Practise distinguishing deficits, borrowing and debt, then using charts and calculations to judge fiscal sustainability problems.
In 2021 it was estimated that a large proportion of the fiscal deficits in both Brazil and Suriname was structural. To what extent is a structural fiscal deficit more serious than a cyclical fiscal deficit? Refer to a developing country of your choice in your answer.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application and Analysis ( 12 marks) - indicative content
- Understanding of fiscal deficit
- Meaning of structural fiscal deficit: estimate of how large the deficit would be if the economy were to operate at a normal, sustainable level of employment and activity/long-run trend rate of output
- Meaning of cyclical fiscal deficit: usually caused by a deficiency in aggregate demand, e.g. when the economy is in a period of recession
- Structural deficit could be permanent if no measures are taken to reduce or eliminate it, and this would imply continuous fiscal deficits and an increasing national debt
- Structural deficits may require tax rises and/or cuts in public expenditure
- Analysis of problems of a rising national debt include:
- reduction in the credit rating
- cost for the future generations
- crowding out (resource and financial)
- cost implications of servicing the debt
- danger of increased inflationary pressures
- Cyclical deficit is likely to be temporary
- Cyclical deficit may be necessary to generate economic growth during a period of economic decline
N.B. Accept why structural fiscal deficit is more serious as KAA and why it is not as EV, or vice versa
N.B. Award maximum of Level 3 ( 9 marks) if a candidate does not refer to a developing country in their answer
Level
Mark Descriptor
Level 0
Level 1
1-3
Descriptive approach which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
- Significance: in some developing countries, structural deficit is a little smaller than the overall deficit - the remaining 'cyclical' part of the deficit would disappear automatically as the economy returns to its trend rate of growth
- Asymmetric information - it is hard to know precisely what the sustainable level would be, so these estimates are always uncertain/unreliable
- Depends how large either type of deficit is (both in money terms and as a percentage of GDP) and how long they last for
- Depends on what the fiscal deficit funds e.g. infrastructure spending will result in higher future economic growth and reducing the future fiscal deficit
- Cyclical deficit might also have a long-term effect on the national debt
- Might not be easy to determine whether deficit/debt is structural or cyclical
- Depends on the size of the fiscal deficit as a percentage/proportion of GDP
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.
Question
In the first quarter of 2022 the USA and Australia both experienced inflows of foreign direct investment (FDI) $67 billion and $59 billion respectively
Evaluate the potential economic benefits to a developed country of FDI inflows.
Indicative content