Economics

Preview and Preparation Pack AS & A2 Resources for the new specification

For first teaching in September 2008

...working together to provide better support for you. Official Publisher Partnership

As part of 14-19 curriculum change, OCR is developing a suite of exciting new AS and A2 level specifications for first teaching in September 2008. At Heinemann, we are proud that OCR has chosen to work with us as official partners to produce new materials to support you through these changes.

Economics Susan Grant | Colin Bamford

What OCR Economics resources will be available from Heinemann? OCR Economics Student Resources

Official Publisher Partnership

AS Student Book Spring 2008 A2 Student Book Autumn 2008

How has the OCR GCE Economics specification changed? The reduction from six to four units within a single new specification.

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The introduction of Stretch and Challenge in A2 units.

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A new unit at A2 level which includes coverage of sustainable development and globalisation.

Find out more about the specification change at www.ocr.org.uk

5 reasons to be confident that the new Heinemann materials will support you through these changes:

¢ Helping students achieve their potential, including advice about Stretch and Challenge. ¢ Lots of inspiring activities for use in class, or for homework, help you to add variety to your lessons.

The main changes to the specification include: ¢

¢ Accessible, engaging student resources tailored to the new specification.

¢ Our unique Exam Café gives students a motivating way to prepare thoroughly for their exams. ¢ Economist’s Toolkit helps your students to grasp and apply the key skills they need.

Turn over for your preview… The following pages show a range of sample materials from the new OCR Economics resources from Heinemann. Please note that this sample material remains subject to OCR Quality Assurance Review

1. Our materials are tailored to the new specification We are working closely with OCR’s Economics team to give you the best support we can. 2. The materials are written by experienced examiners Authors Susan Grant, Colin Bamford and Stephen Walton are experienced examiners. 3. Whatever units you choose, we’ll support you We are supporting both optional units at A2 because we know how frustrating it is if you’re teaching an under-resourced option. 4. Heinemann’s resources complement OCR’s support materials Our resources will complement OCR’s teacher support materials. 5. All the new resources will be tried and tested by tutors and students At Heinemann, we always use extensive feedback from tutors and students. 2

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AS Student Book

AS Student Book

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Lost output One of the most significant costs of unemployment is lost output. Having people who are willing and able to work without jobs is a waste of resources. If these people were in work, the country would produce more goods and services and so material living standards would be higher. For instance, more houses might be built, more films made and more banking services provided if more of the labour force were employed. Figure 5.1 below shows an economy producing inside its production possibility curve. Actual output is below potential output. Capital Goods

A = Actual output

A

&(9.;.9> Between 2004 and 2007 the real GDP of Morocco averaged $50bn and its unemployment rate 10%. A Moroccan journalist commented that unemployment had cost the economy a loss of output of $20bn over the four year period. a) How do you think the journalist arrived at a figure of $20bn for lost output? b) Explain two reasons why this figure is likely to have been an overestimate.

Lost tAx revenue

Unemployment means that tax revenue is lower than possible. If more people were in work, incomes, spending and possibly profits would be higher. This would mean that the government would collect more revenue from income tax, VAT, excise duty and corporation tax. This higher tax revenue could be spent, for instance, on education, health care and transport. Such spending might improve the quality of people’s lives and increase the country’s productive capacity. If a government wants to maintain a given level of spending in the face of rising unemployment, it will either have to raise tax rates or borrow. Higher tax rates will reduce people’s disposable income and their spending power. A rise in government borrowing may push up the rate of interest which in turn will reduce people’s discretionary income.

Government spendinG on unempLoyment beneFits

0

Consumer goods Loss oF potentiAL output

Figure 5.1 An economy producing inside its production possibility curve

If unemployment rises the government will have to spend more on unemployment related benefits, principally job seekers allowance. This may mean that it has to reduce its spending on other areas such as education or will have to raise its borrowing or tax rates. So the money spent on unemployment benefits has an opportunity cost – it could have been used for other purposes or it could have meant lower tax rates and/or lower government borrowing.

Full-colour diagrams clearly illustrate key concepts. ALevelEconomics-BLAD2.indd 12 Specimen: Subject to OCR Quality Assurance Review

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pressure on other Forms oF Government spendinG

some experience a loss of status when they become unemployed.

As well as affecting the amount the government spends on unemployment related benefits, rising unemployment can put upward pressure on a variety of other forms of government spending. When people are unemployed they are more likely to suffer health problems, including mental health problems, marital difficulties and some may even turn to crime.

The children of the unemployed can also suffer. Unemployment is one of the main causes of poverty and children from poor households tend to suffer worse health and perform less well at school. They may have fewer educational tools at home, be less likely to have their own bedroom to study in and usually have lower expectations.

More health problems will mean higher waiting lists for health care unless the government spends more on the sector or raises its productivity. Marital break ups can increase the need for housing and push up government spending on housing benefits and the provision of social housing. If rising unemployment does lead to increasing crime, the government will have to spend more on the police and judicial system.

Costs to the unempLoyed As mentioned above, the unemployed may suffer from poor health and family break ups. They are also likely to experience a loss of income. Most of those unemployed usually earned more than they receive in job seekers’ allowance. The loss of income is particularly acute in the case of those not entitled to unemployment benefit. Work provides some people with a sense of purpose and worth and

Hysteresis One of the costs of unemployment can be unemployment itself. The longer people are out of work, the more difficult it can be for them to gain another job. The problems arise both in terms of the demand for and supply of labour. Employers may be reluctant to take on those who have been out of work for a long time for two key reasons. One is that the length of time they have been out of a job may indicate that they are not good workers. The other is that the longer someone is unemployed, the more rusty their skills become and the more out of date they become with advances in working methods and technology. On the supply side, the long-term unemployed may tend to seek work less actively over time. They may lose the work habit and get used to being at home. Perhaps more significantly, they may become discouraged by rejection after rejection.

&(9.;.9> J>;H?I;E;D;;JI Neets is a term that covers young people in the UK, aged between 16 and 24, who are not in employment,education or training. These people tend to lack basic skills – indeed many are functionally

illiterate and innumerate. A high proportion come form homes where neither parent is working or where there is a single parent who is either unemployed or economically inactive.

ALevelEconomics-BLAD2.indd 13 Specimen: Subject to OCR Quality Assurance Review

a) Distinguish between someone being unemployed and someone being economically inactive. b) Explain why the children of the unemployed stand a greater than average chance of being unemployed themselves. c) Comment on one government policy measure which could reduce the number of Neets.

Real-world activities with differentiated questions bring learning to life and reinforce understanding.

SPECIMEN

Unemployment can have a number of consequences for the economy, for those unemployed and for other economies.

SPECIMEN

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AS Student Book

AS Student Book

Learning tips help the student understand common errors, and give valuable guidance on preparing for the exam.

Terms are clearly explained where they occur and are brought together in the glossary. part 2 9-*3&9.43&1&3).39*73&9.43&1*(4242>

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hysteresis − Unemployment causing unemployment. Long-term unemployment − Unemployment lasting for more than a year.

the Costs on other eConomies Unemployment in a country’s trading partners is likely to reduce demand for its exports. This in turn will reduce the country’s aggregate demand and may cause some unemployment. A country may also experience immigration from countries with high and rising unemployment. This can be beneficial if the country has an ageing population and a shortage of labour but it may place a burden on the country’s housing stock.

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reduCed pressure on the priCe LeveL Figure 5.2 possible benefits of unemployment

a) Compare the unemployment rate in the countries in April 2007.

The existence of a relatively high level of unemployment may discourage workers from pressing for wage rises and made dissuade them from taking industrial action.

b) Compare the change in the unemployment rate in the countries between April 2006 and April 2007.

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source: the economist

c) Were there more people unemployed in France or the US in April 2007? Explain your answer. In assessing economies’ unemployment performance, it is more informative to use unemployment rates rather than the number unemployed (think about your answer to question c) above). Where possible, use figures based on the same measure of unemployment.


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It is generally agreed that the costs of unemployment above a certain level exceed any benefits. This is why governments throughout the world aim for low unemployment. Indeed low unemployment or full employment is one of the main macroeconomic objectives pursued by governments.

the siGniFiCAnCe oF unempLoyment How significant the consequences of unemployment are depend on how much unemployment there is, how long on average people are unemployed,

SPECIMEN

)*+.3.9.438

There are a few possible benefits of unemployment. For a few people it may give them time to search for a more rewarding job. The existence of unemployment makes it easier for firms, wishing to expand, to recruit workers. It can also reduce demand-pull and cost-push inflation. Figure 5.2 shows that when the economy moves from producing at full employment to a lower level of output and some unemployment, the pressure on the price level falls.

24/7/07 3:59:21 pm

Students often assert that a rise in unemployment will lead to a deterioration in the current account position on the balance of payments as less will be produced and so less exported. The effect is more complex and it is possible that rising unemployment may be associated with an improving current account position. This is because with higher unemployment, there will be less spending in the economy. This should mean less spent on imports. Some products designed for the home market might also be diverted to the export market. If you are going to refer to the impact on the current account you need to recognise that the effect is uncertain.

the benefits provided to the unemployed, the type of unemployment and the distribution of unemployment. The higher the rate of unemployment, the more serious the costs are likely to be. A 3% unemployment rate is not considered to be a problem. This is because there will always be some people in between jobs. Indeed, frictional unemployment exists even in a booming economy. In contrast a 10% unemployment rate, for instance, would involve a greater loss of output, higher government spending on benefits and a greater loss of tax revenue. The comments above depend on the 3% unemployment and the 10% lasting for the same length of time. It is important to consider not only the rate of unemployment but also the duration. A 6% unemployment rate with people on average being out of work for 2 years would have more harmful effects that a 10% rate with people being out of work on average for only three months. This is because costs tend to build up over time and when people have been out of work for more than a year, they often find it difficult to get a job. Generous unemployment benefits reduce the costs of unemployment to the unemployed but they have


an opportunity cost. The costs of unemployment benefits and other costs of unemployment will also tend to be high if the unemployment is cyclical unemployment. This is because such unemployment is widespread and can be on a significant scale. Cyclical unemployment tends to have the highest costs and frictional unemployment the lowest costs. Structural unemployment is more serious than frictional and is likely to cause problems in particular areas of the country.

&(9.;.9> KD;CFBEOC;DJ?DP?C878M; In May 2007 unemployment reached 53% in Zimbabwe. This high rate of unemployment has contributed to rising malnourishment and a smaller proportion of children going to school. It has also led to between three to four million of the country’s population of 13 million leaving the country.

a) Explain how a high rate of unemployment can result in ‘malnourishment and a smaller proportion of children going to school.’ b) Using a production possibility curve, explain the effect on the Zimbabwean economy of the events in the text.

The costs of unemployment are not usually borne evenly. This is because particular groups, including young men, tend to be more susceptible to unemployment. This uneven distribution of unemployment can be socially divisive. In your exam, be prepared to discuss the benefits of a fall in unemployment as well as the consequences of unemployment.

SPECIMEN

the beneFits oF unempLoyment

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A2 Student Book

A2 Student Book To help students grasp concepts fully, key concepts are explained in more detail, with examples.

Relevant, up-to-date examples are worked into the text to ensure lively, enjoyable learning.

Extension activities stretch and challenge students.

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which is overseeing the project, is currently looking for financial backers for this £13bn project. Its cost-benefit appraisal of the scheme provides a convincing case for would-be backers (see below).

In June 2007, the new LGV-Est line, France’s fastest railway link, carried its first passengers between Paris and Strasbourg. This huge project costing an estimated €4bn (c.£2.7bn) took just five years to complete. This is in stark contrast to London’s Crossrail project which was first proposed in 1989 and has been repeatedly delayed.

Supporters of Crossrail argue that the proposed rail link is of national importance and not just of benefit to the London area. Top of the list is Mayor Livingstone who has stated ‘Crossrail is vital for the incomes and jobs of Londoners…it is even more important to London’s long term prosperity than our victory in winning the Olympic Games.’ The Government is also very much in favour of the scheme for similar strategic reasons. Not all Londoners though are as enthusiastic as the Mayor is about Crossrail. In East London, for example, residents and politicians are concerned about the physical impact that will result from a six year construction phase. They are also concerned about the wider effects on the community, fearing that once operational, Crossrail will result in a rise in house prices forcing some families out of areas where they have lived for generations. Only time will tell whether, as one local MP has said, Crossrail will be another Millennium Dome.

)*+.3.9.43 Cost-benefit analysis – a method whereby the social costs and benefits of a project are compared in monetary terms.

EConomiC aPPraisal oF Crossrail

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Funding Crossrail is a major issue. Although some central government funding will be available, the largest contribution will have to come from the private sector. Cross London Rail Links (CLRL)

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The case for Crossrail, like any major new transport infrastructure project, has to be justified through an economic appraisal. As in the case of roads, this is based on cost-benefit analysis and follows standard Department for Transport (DfT) principles that have been applied for almost 50 years.

1. (i) Explain why the valuation of travel time savings is an important item in transport cost-benefit analysis.

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SPECIMEN

To be fair, Crossrail is a hugely ambitious and in some respects controversial project. The intention is to link existing rail track between Maidenhead and Heathrow Airport in the west to Shenfield and Abbey Wood in the east. To achieve this involves large scale tunnelling under Central London and the construction of seven new stations. These are at Paddington, Bond Street, Tottenham Court Road, Farringdon, Liverpool Street, Whitechapel and Canary Wharf (see Figure 8.1).

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Table 8.1 below summarises the monetary values of these benefits and costs as estimated by CLRL. The benefits are split between trips made in the course of work and those made for leisure and commuting purposes.

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Extension

2. Discuss some of the likely measurement issues in estimating the wider impact effects of a project such as Crossrail.

As this table shows, Crossrail is expected to generate over £16bn of user benefits, with about one third accruing for business trips that carry the highest value of time savings per hour of travel time saved.

The cost-benefit analysis also considered the effect of Crossrail on net rail revenue. Crossrail’s own revenue is an obvious benefit but account must also be made of the loss of revenue to other rail operators where passengers switch to Crossrail. There is also a reduced contribution to the Exchequer as motorists switching to Crossrail will pay less indirect taxation through fuel tax in particular. So far this summary of the cost-benefit analysis has followed the normal methodology. In planning Crossrail, one of the objectives has been to facilitate the continuing development of London’s Finance and Business Services sector. This is an impact effect or secondary benefit arising from Crossrail.

Q

Leisure/Commuting trips • time savings • improved quality • other

7.985 2,889 355

Business trips • time savings • other

4,847 17

Total benefits

(ii) Why is ‘the opportunity cost of these travel time savings’ classified as a benefit?

16,093

Table 8.1 Projected user benefits and costs of Crossrail (present value)


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Capital costs Maintenance costs Operating costs

10,626 1,606 1,670

Total costs

13,902

Source : Cross London Rail Links, 2005

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Student Exam Café

Students get handy advice to help them start thinking about the exam

Student Exam Café Our unique Exam Café is where students will find lots of ideas to help them prepare for their exams. They can Relax, because there’s handy advice from fellow students, Refresh their memories with summaries of the key ideas, and Get That Result with lots of hints and tips on writing high-scoring answers.

Exam Café

Relax, Refresh, Result!

Relax and prepare To build up your examination skills and to reinforce your understanding of the topics and concepts before the Unit 2 exam, it would be a good idea to: •

Check definitions of key words. You might do this by testing another member of your class in return for him or her testing you. You could also write the definitions on cards or a wall chart. It would also be useful to draw an aggregate demand and aggregate supply diagram and place it on your wall at home or somewhere else where you will see it regularly.

•

Make sure that you have completed all the activities in the chapters in Part 2.

•

Produce tables and spider diagrams to summarise key points, make comparisons and show links.

•

Practise answering past examination papers – this will make the exam seem less daunting.

The more straightforward questions tend to be at the start of the paper and the more demanding ones towards the end.

ons Tips for answering questi

On opening the paper, first read through the questions. You may want to highlight

the command words and other key words. Then check the data, again highlighting any key words.

It pays to answer the questions in order. Forming your answers to the earlier questions, should help you to answer the later questions. It should also mean that your answers do not overlap.

Some of the questions on the paper will require you to interpret the data. This may, for

Refresh your memory

instance, mean that you have to identify certain points from the text, explain what a table shows and comment on the trend shown in a graph.

The last question on the paper is an evaluative one which starts with the word

‘discuss’. It is the highest mark question. You should spend approximately 20 minutes on your answer to this question.

Revision checklist

Make sure you know all the components of aggregate demand and can explain the influences on each one.

Find examples of real-world causes of changes in aggregate supply.

Draw aggregate demand and aggregate supply diagrams to show the effect of real world changes e.g. the impact on the US economy of the US Federal Reserve Bank cutting the rate of interest.

Check that you can distinguish between injections and leakages and that you can explain their links to the circular flow.

Confirm your understanding of the meaning of government macroeconomic policy objectives and how the key policy indicators are measured.

Make use of up to date figures to assess how some economies are performing.

Any diagrams you draw in your answers should be clear, well labelled and accurate. As well as paying attention to command words, you should also take into account how many marks are being awarded and the space provided in the answer booklet.

For example, a question may ask you to state two components of aggregate

demand. It may give two marks and the answer booklet may provide just one or two lines. In this case just write, for instance, consumption and investment. You should not waste time and effort stating more than two or describing or explaining two.

In contrast, a question asking you to explain or analyse will require more depth. For example, in answering the question ‘Explain the effect of a rise in the rate of interest on consumption’ it would not be sufficient to just state consumption would fall. You should explain how the change in the rate of interest would affect the incentive to save, the cost of borrowing and discretionary income.

Exam Café

RS exam café.indd 4 Specimen: Subject to OCR Quality Assurance Review

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e? What will the exam look lik As with the Unit 1, the Unit 2 exam consists of data in the form of text and a diagram or table. There is usually between 12 and 14 questions set on this information.

Getting started…

Get the result !

Exam Café Revision checklists remind 25/7/07 students 10:21:07 of the key concepts, topics and skills they need to revise for the exam.

RS exam café.indd Subject 5 Specimen: to OCR Quality Assurance Review

Examiners give guidance on how best to approach questions.

25/7/07 10:21:08

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Coming soon from

OCR


Economics

Economics Susan Grant | Colin Bamford


How to find out more You can evaluate the OCR Economics resources from Heinemann absolutely free for 60 days. To order the resources listed below:

Tel: 01865 888080 Fax: 01865 314029 Email: [email protected] Inspection copies will be sent to you as soon as they are ready, and can be returned free of charge if you decide you do not want to keep them. AS Economics Student Book 978 0 435692 20 9 Price £17.99*

Spring 2008

A2 Economics Student Book 978 0 435692 21 6 Price £19.99*

Spring 2009

*Prices are provisional until publication.

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