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Centre
No.

Surname

Paper Reference

6 3 5 6

Candidate
No.

0 1

Initial(s)

Signature

Paper Reference(s)

6356/01

Examiners use only

Edexcel GCE

Team Leaders use only

Economics
Advanced

Question Leave
Number Blank

Unit 6 The UK in the Global Economy

(Synoptic Unit)

Section

Section

Monday 27 June 2005 Morning

Time: 1 hour 45 minutes
Materials required for examination
Nil

Items included with question papers

Nil

Instructions to Candidates
In the boxes above, write your centre number, candidate number, your surname, initial(s) and
signature.
Check that you have the correct question paper.
Write your answers in the spaces provided in this question paper.
Answer ONE Question from Section A and ONE Question from Section B.
Indicate which question you are answering by marking the box ( ). If you change your mind about
an answer, put a line through the box ( ) and then indicate your new question with a cross ( ).

Information for Candidates

This question paper is designed to give you the opportunity to use the skills and ideas
developed throughout the course in a new context. You may include in your answers relevant
information from the whole of your course, where appropriate.
There are 28 pages in this question paper. All blank pages are indicated.
The marks for the various parts of the questions are shown in round brackets: e.g. (2).
Questions in Section A will be marked out of 100; those in Section B will be marked out of 50. The
mark out of 100 for Section A will be divided by two and added to the mark out of 50 on the chosen
question from Section B.

Advice to Candidates
You are advised to divide your time equally between Section A and Section B.
You will be assessed on your ability to organise and present information, ideas, descriptions and
arguments clearly and logically, taking into account your use of grammar, punctuation and spelling.
This publication may be reproduced only in accordance with
Edexcel Limited copyright policy.
2005 Edexcel Limited.
Printers Log. No.

M21517A
W850/S6356/57570 7/5/6/6/6/4/4/4/3/

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SECTION A
Answer ONE question from this section.
You should spend approximately 45 minutes on this section.
You may include diagram(s) in your answers where these are helpful.

1.

(a) Examine the significance of the factors which have contributed to increased
globalisation in recent years.
(40)
(b) Evaluate the likely implications for the world economy of the predicted decline in
non-renewable energy resources.
(60)

Q1

(Total 100 marks)

2.

(a) Examine the factors which affect the international competitiveness of the UKs goods
and services.
(40)
(b) Evaluate the likely economic effects of a fall in the UKs competitiveness.
(60)

Q2

(Total 100 marks)

3.

The average tariff on industrial goods is 4% in the USA, 14% in Brazil and 30% in India.
(a) Examine the reasons why a country might wish to restrict imports.
(40)
(b) Evaluate the likely economic implications of an increase in protectionism on a
countrys economy.
(60)
(Total 100 marks)
TOTAL FOR SECTION A: 100 MARKS

Put a cross in the box indicating the question from Section A that you have chosen ( ).
If you change your mind, put a line through the box ( ) and then indicate your new
question with a cross ( ).
Chosen Question Number: Question 1

Question 2

Question 3

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SECTION B
Answer ONE question from this section.
You should spend approximately 45 minutes on this Section.
If you answer question 4 put a cross in this box
Question 4
Extract 1

Britain and the Euro

The five economic tests

In June 2003 Gordon Brown, the Chancellor of the Exchequer, announced that the UK would
not be adopting the euro because four out of five tests had been failed. The only one passed
was that relating to financial services. These five tests and the Chancellors view on them are
outlined below.
z

Convergence: Is there sustainable convergence between the UK and euro zone economies?
Apart from output gaps, interest rates, inflation and unemployment rates, an important
factor is the UKs housing market which is significantly different from those in the euro
zone. In Britain, 70 per cent of households are homeowners, compared with 40 per cent in
Germany.
Flexibility: Is there sufficient flexibility in the UK economy to respond to shocks if it
joined the euro zone? At present the pound can fall if Britains costs get out of line with
those of the euro zone. But once Britain joins the euro, wages will have to fall to restore
competitiveness.
Investment: What will be the effect of the euro on investment in the UK? Foreign
investment might increase if Britain joins the single currency but only when tests for
convergence and flexibility have been met. Therefore, the verdict is entirely dependent on
the results of the first two tests.
Financial services: What will be the verdict on the UK financial services industry? Entry
into the single currency would benefit the City of London and Britains powerful financial
services industry.
Growth and jobs: How will the euro affect UK employment and jobs? Joining the euro
would bring an increased risk of high unemployment because Britains economy has failed
to converge significantly with those in the euro zone.

(Source: adapted from The Economist, 3 May 2003 and 14 June 2003, and The Daily Telegraph, 10 June 2003)

Extract 2

A new role for fiscal policy

The Treasury is exploring an important new plan to use fiscal policy to counter greater
economic fluctuations in the economy once Britain joins the euro. The Chancellor wants to
reinvent fiscal demand management which was used so enthusiastically in the 1950s and
1960s.
(Source: adapted from The Economist, 14 June 2003)
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Figure 1 Price differences between euro

zone countries

Figure 2 Mortgage lending by type of

loan
% of new residential lending, 1999

40%
35

Variable

30

100

25

80

20

60

15

40

10

20

(Source: Sunday Times, 29 June 2003)

Figure 3 Unemployment rates

Germany

Fixed up to 5 years

Spain

Fixed
5-10 years

France

Italy

Fixed over
10 years

UK

(Source: Financial Times, 10 June 2003)

Figure 4 Official interest rates

%
8
6
4
2
0

(Source: Financial Times, 10 June 2003)

(Source: The Economist, 3 May 2003)

Figure 5 Inflation rates as measured by the Consumer Price Index (CPI)

(Source: Financial Times, 10 June 2003)

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(a) With reference to Figure 1, outline two possible reasons why price differences
between euro zone countries have persisted after the adoption of the single currency.
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(4)

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(b) (i) With reference to Extract 1 and to Figure 2, outline two reasons why the UKs
housing market represents a barrier to the UKs membership of the euro.
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(6)

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(ii) With reference to Figure 3, examine two likely reasons for the difference
between unemployment rates in the UK and the euro zone.
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(8)

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(iii) To what extent do the data in Figures 3, 4 and 5 suggest that the UK economy is
converging with the euro economies?
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(10)
(c) With reference to the information provided, assess the likely impact on the UK
economy of a decision by the UK government to adopt the euro.
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(12)

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(d) With reference to Extract 2, discuss how fiscal policy might be used to manage the
economy if the UK joined the euro.
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(10)

Q4
(Total 50 marks)
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If you answer Question 5 put a cross in this box

Question 5

UK in Debt

Extract 1

10

15

20

Debt of all types is increasing. Consumer borrowing on credit cards and through mortgage
equity release schemes, has reached record levels. It is the huge increase in consumer
spending which has kept the economy growing over recent years. The Governor of the
Bank of England admitted that the UKs record 900 billion debt burden meant that the
Banks Monetary Policy Committee would have to move carefully on interest rates. He
said, There is a risk that some heavily indebted households will be badly affected by
changes in economic circumstances or in interest rates.
Meanwhile, government borrowing is on the increase. The National Institute of Economic
and Social Research predicts net borrowing of 26 billion in 2003-4, rising to 34 billion
in 2004-5 and 40 billion for 2005-6 (which is nearly double the Treasurys prediction).
The worrying thing about these forecasts, the National Institute says, is that they come at
a time of economic recovery.
A further cause for concern is the UKs deficit on the trade in goods and services account.
In September 2003 exports fell while consumer demand continued to suck in imports.
Stripping out the surplus on services, the UK imported 4.8 billion more goods than it
exported, the second biggest deficit on record and equivalent to 4.3 per cent of GDP. It is
the latest evidence of a pronounced imbalance in the economy that is creating a headache
for the Bank of England as it tries to slow consumer demand without causing serious
difficulties for manufacturers.
The pound weakened against the dollar and euro something economists say could
accelerate if the trade position worsens. Analysts said the Bank faced a stark choice
increasing interest rates to stem consumer demand that might drive up the pound, or
keeping them low at the expense of a housing boom.

(Source: Independent on Sunday, 16 August 2003; Sunday Times, 27 July 2003; Independent, 12 November 2003)

Figure 1

Consumer debt as a percentage of disposable income

%

(Source: Independent on Sunday, 16 August 2003)

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Figure 2

Public sector net borrowing

(Source: David Smith, Sunday Times, 27 July 2003)

Figure 5

UK trade in goods and services

Ireland

France

Germany

China

Services
USA

Cars

The UKs trade position with selected countries

Consumer
goods

Figure 4

Oil

The UKs trade imbalance by sector

Goods

Figure 3

(Source of Figures 3, 4 and 5: The Independent, 12 November 2003)

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(a) Distinguish between a deficit on the trade in goods and services account and a fiscal
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(4)
(b) Outline two factors which might explain the increase in the level of consumer debt,
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(6)

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(c) Examine two factors which might explain the changing state of public sector finances
between 2000-01 and 2003-04, as shown in Figure 2.
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(8)

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(d) With reference to Figures 3, 4 and 5, examine factors which might explain the trend
in the UK trade in goods and services account.
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(10)
(e) Assess the likely implications of a fall in the sterling exchange rate.
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(12)

Turn over for Question 5(f)

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(f) Evaluate the impact of an increase in interest rates on consumers (Extract 1, line 22).
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(10)

Q5

(Total 50 marks)
TOTAL FOR SECTION B: 50 MARKS
TOTAL FOR PAPER: 100 MARKS
END

Every effort has been made to contact the copyright holders where possible. In some cases, every
effort to contact copyright holders has been unsuccessful and Edexcel will be happy to rectify any
omissions of acknowledgement at the first opportunity.

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