3/9/24, 12:38 PM DP Economics: Sample 2

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Sample 2
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Candidate number 2

(ai) Infrastructure refers to physical capital in a country such as telecommunications, roads, power, transport
e.t.c.

(ii) Microcredit refers to a small loan from NGOs or banks to promote self sufficiency and funding for
investment projects. These are usually given to low income households (mainly women) with low credit rating.

(i) The candidate provided a definition that includes just one of the required ideas: large scale physical equipment.
(1 marks)

(ii) Two key areas identified, firstly that a micro loan is a small loan and also that they are available to low income
households with a low credit rating. (2 marks).

(b) i. Complete the following table which expresses HDI as an index. The year 2013 has been set to 100. [3]

2013 2014 2015 2016 2017 2018 2019

Human
development index 100 101.45 103 103.12 104.4 104.6 106.1
(HDI)

Table correct 3 marks

(ii) 2 ways that making ‘it easier to gain access to credit’ might help the Indonesian economy is because the
loans provided might increase investment (from small businesses) and higher consumption - these are both
components of aggregate demand.

(c) The government's decision to reduce fuel subsidies would result in a leftwards shift of the supply curve
from S1 to S2 due to lower incentives for producers to supply fuels, as they would earn lower revenues. As a

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3/9/24, 12:38 PM DP Economics: Sample 2
result of higher prices from P1 to P2 quantity decreases due
to higher prices from P1 to P2. Also because of % of people
live in poverty (paragraph 2).

2 marks for a correctly labelled supply and demand diagram showing a shift to the left in the supply curve and a
new equilibrium with a higher price and a lower quantity. 2 marks for an explanation that the reduction in fuel
subsidies will lead to increased costs and so a fall in supply and a resulting higher price and lower quantity. The
last sentence about the % living in poverty is not relevant to the question and can be discounted.

(d) An investment of $ 22 billion by the government in

infrastructure projects would improve factor mobility and
facilitate more trade opportunities as the quantity and quality
of physical capital would have been improved. This would
cause an increase in the long run aggregate supply curve
and an increase in Indonesia's production possibilities,
therefore shifting the PPC outwards to the right.

The response included both a PPF diagram showing an outward shift in the productive capacity of the nation and
an explanation that the increase in infrastructure spending would be likely to lead to an increase in the quantity and
/ or quality of the factors of production (capital). (4 marks)

(e) The lorenz curve is used to represent the income inequality present in an economy. The straight line on
the graph represents the income equality line where each % of the population receives the same income. The
gini coefficient represents the slope of the curve for different economies. The closer the line is to the 100%
equality curve the more equal the nation is. In the graph, the lorenz curve is closer to the line of pure equity in
2019, than 2013, indicating that income inequality in the nation has fallen - 0.41-0.37. The Gini coefficient
hence illustrates the income distribution amongst the population and the lower the number, the more equal a
nation is.

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3/9/24, 12:38 PM DP Economics: Sample 2

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(f) Lower economic growth rates in

different countries will mean a fall in GDP in those
countries which will mean that they spend less on
buying goods and services from Indonesia. As a
result demand for their exports will fall e.g. demand
for Indonesia's crops so (X−M) decreases. Since
(X−M) is a component of aggregate demand (AD) its
decrease will cause AD to fall, seen by an inward
shift of the AD curve from AD1 to AD2, causing a
deflationary gap - real GDP falls from Y1 to Y2.

4 marks, though the LRAS and deflationary gap were not necessary.

(g) Market orientated policies hope to improve living conditions for private firms allowing the market to drive
economic growth and and thereby development e.g. 'reducing red tape' and 'tax cuts for industries' e.t.c.
Interventionist policies have the government actively managing the economy providing 'fuel subsidies' and
'infrastructure projects' and so on.

The market based policies mentioned here are aimed at reducing business costs by eliminating 'excessive
regulation'. These measures improve the efficiency of firms in producing goods and services so that a fruit
stand in Jakarta could sell at a lower cost if they do not first have to purchase an expensive license.
Removing the license requirement reduces the costs of production, increasing the LRAS to LRAS2, increasing
GDP to Y2 and reducing average price levels to PL2. There seems to be significant scope to reduce costs as
businesses complain of excessive compliance and paperwork.

However, this higher growth may not lead to development. Foreign investors which benefit might not invest
their profits into the domestic economy, instead repatriating their profits back to the home country.
Furthermore the distribution of the extra income may not be equal, instead going to high income firms. This
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3/9/24, 12:38 PM DP Economics: Sample 2

could further excabate the problems that already exist,

increasing the current gini coefficient beyond its current
level of 0.37.

It should also be noted that the relief of some regulations could actually hurt living standards by removing
useful health and safety or polluting regulations. The production of petrol, for example, would have significant
negative externalities if lightly regulated so that MSC > MSB as the next diagram indicates. In this example
the lighter regulations have reduced welfare by reducing the price (and increased the supply) of fuel below its
socially optimum level. This was seen in Nigeria where oil production made living standards for many worse,
not better, as the benefits of oil profits were received by a small number of people while many poor
households saw their own livelihoods destroyed by pollution of their staple crops.

Interventionist policies such as investment in infrastructure and education and training projects and so on
would have a similar affect on LRAS to deregulation, increasing it from LRAS1 to LRAS2. This comes about
more directly from an improvement in the physical and human capital of the Indonesian economy. But this
type of policy contributes more directly to improvements in development, as education improves living
standards by itself. This is done by allowing those in poverty to acquire semi skilled jobs. If education is
provided effectively this can reduce inequality rather than increasing it as regulations might. Similarly
infrastructure improvements should benefit everyone and have positive externalities.

However, intervention is vulnerable. The need for 'reducing corruption' suggests that the money allocated for
infrastructure improvements might be poorly invested, spent on personal enrichment or cronyism. This would
mean a stagnation of the LRAS curve and entrenchment of political corruption and inequality crippling
development.

Command term: Discuss

Meaning offer a balanced review of the relevant arguments, factors with opinions and conclusions supported by
appropriate evidence.

This response included a lot of information, much of it relevant and focused firmly on economic development rather
than growth, which the question asks.

Overall a balanced response which included both interventionist and free market policies aimed at promoting
economic development and th response also made good use of appropriate diagrams. This response was
awarded 12 / 15, mark band 4.

The whole response scored 36 / 40.

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