Read the source material carefully before answering Question 1. Source material: Changes in the economy of Montenegro Montenegro fact file 2020 Population 608000 GDP 4.8bn Government budget deficit -0.6 bn Unemployment rate 18.0% Inflation rate 0.4% Montenegro is a European country that has seen an increase in the role of its private sector. By 2020, 90% of state-owned firms had been privatised. All commercial banking, telecommunications and aluminium production has been transferred to the private sector. The country's banks now have more computers, more workers and more office buildings. Most years, Montenegro attracts three times as many tourists as the number of people who live in the country. Tourism is a very competitive market. Demand for holidays is price-elastic which has implications for the pricing strategy of firms in the industry. The proportion of workers employed in tourism and other tertiary sector industries has increased. In 2020, 75% of Montenegro's labour force were employed in the tertiary sector. Some of the workers employed in the primary sector help in the growth and export of oranges. It has been suggested that a minimum price should be set for oranges and some other crops. Changes in the price of a country's exports can affect both the trade in goods and services balance and the current account balance of its balance of payments. Table 1.1 gives selected details of six East European countries' balance of payments in 2020. Table 1.1 Trade in goods and services balance and current account balance of six East European countries 2020 Country Trade in goods and services balance ($ million) Current account balance ($ million) Bosnia & Herzegovina -2914 -624 Bulgaria 2318 2742 Croatia -317 1456 Kosovo -2141 -459 Montenegro -1174 -837 Slovenia 4609 3049 A country's international trade position is influenced by the amount and pattern of consumer spending. Privatisation has had an influence on consumer spending. Moving to the private sector has affected investment, the number of workers employed and competition in those industries. It has also affected firms' objectives, prices and their responsiveness to changes in consumer demand. In 2020, Montenegro experienced very low inflation. It was expected that this could turn into deflation. A fall in the price level could affect the country's output, employment and balance of payments.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] 1(a) Calculation is -$0.6 bn divided by $4.8 bn; Allow 12.5; 12.5%.
2. [2] 1(b) Computers (1) office buildings (1); These are the only two capital goods mentioned in the text but accept answers such as telecommunications equipment and aluminium production factories.
3. [2] 1(c) If demand is price elastic / high (1) firms will know that if they raise price, revenue will fall / if they lower price, revenue will rise (1). One mark for the way identified and one mark for an explanation. Note: source material only mentions demand for holidays as being price-elastic. No mark for identifying price-inelastic but do allow second mark that price inelastic demand means if they raise price revenue will rise / if they lower price, revenue will fall. Do not reward impact on demand or on profits.
4. [4] 1(d) Logical explanation which might include: Higher proportion of workers employed in the tourism industry / tertiary sector (1) growth in tourism / lower proportion employed in primary and secondary sectors (1). More workers employed in the private sector / commercial banks / telecommunications / aluminium products (1) due to privatisation / less employed in state sector (1). One mark each for each of two reasons identified and one mark each for each of two explanations. Note: question requires a reason for the change in pattern of employment.
5. [4] 1(e) Coherent analysis: Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Minimum Price / Price floor line set above the equilibrium and correctly labelled - accept Pmin or Pm or MP but not P2. Supply shown as greater than demand e.g. labelling of Qd<Qs (1). Note: No mark for showing minimum price if also shows a shift in supply or demand curve as it is no longer above market equilibrium. Ignore all written comments.
6. [5] 1(f) There are two approaches to answering this question: Approach A: Coherent analysis which might include: Expected relationship: MAX 2 marks. Positive / direct relationship (1). Countries which have a deficit on the trade in goods and services balance might be expected to have a deficit on the current account balance (1). Countries which have a surplus on the trade in goods and services balance might be expected to have a surplus on the current account balance (1). Supporting evidence: MAX 2 Marks; Three countries / Bosnia & Herzegovina / Kosovo / Montenegro all have a deficit on the trade in goods and service balance also had a deficit on the current account balance (1) two countries / Bulgaria / Slovenia had a surplus on the trade in goods and service balance but also had a surplus on the current account balance (1). Exception: Max 2 marks; Croatia (1) had a deficit on trade in goods and services balance but a surplus on the current account balance (1). Approach B: Expected Relationship: Max 2 marks. There is no expected relationship as the current account balance contains other items which can either be positive or negative (1) and are not dependent on the trade in goods and services (1). Supporting evidence: Max 2 marks; There are 5 countries where the current account balance is higher than the trade in goods and services balance (1) example (1). Exception: Max 2 marks; Slovenia (1) where current account balance is worse that trade in goods and services balance / trade in goods and services is $4.6bn but current account balance is only $3.0bn (1). Analysis for both approaches: Max 3 marks; Trade in goods and services is the largest component of the current account (1) current account also includes primary income and secondary income (1) Bosnia & Herzegovina, Bulgaria, Croatia, Kosovo and Montenegro must have had a surplus on the primary and secondary income (1) Slovenia must have had a deficit on the primary and secondary income (1). Allow income for primary income and current transfers for secondary income. Responses do not have to be in the format suggested but they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, and analyse the overall data. Do not accept relationship is directly proportional.
7. [6] 1(g) Award one mark for an accurate explanation of what is meant by privatisation. Award up to 4 marks for logical reasons why it might, which may include: Firms are profit driven (1) may have increased investment / research & development (1) raising quality of goods and services (1) lowered cost of production (1) more firms entering the market (1) increased competition (1) may reduce prices (1) may give more choice to consumers (1) firms may respond more quickly (1) to changes in consumer demand (1). Award up to 4 marks for logical reasons why it might not, which may include: state-owned firms may have been subsidised (1) investment may be now lower (1) privatised firms may be profit maximisers (1) may become monopolies (1) and may restrict supply (1) to push up prices (1) lowered quality of goods produced (1) creates inequality as not all consumers can afford to buy (1) privatised firms may be smaller (1) and so not able to take advantage of economies of scale (1) privatised firms do not take account of external costs (1) e.g. pollution (1). Apply this example to all questions with the command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d). Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Note: The question is about the impact on consumers. Do not reward answers that relate to the economy or the government.
8. [6] 1(h) Award one mark for an accurate explanation of what is meant by deflation e.g. a fall in the price level is sufficient here. Award up to 4 marks for logical reasons why it might, which may include: could make products more internationally competitive (1) leading to greater exports (1) reducing imports (1) improving the current account balance / reducing a deficit on the current account (1) if caused by advances in technology / supply side measures e.g. higher labour productivity (1) could increase output (1) and employment (1) and lead to economic growth / higher standard of living (1). Award up to 4 marks for logical reasons why it might not, which may include: current inflation rate is only 0.4% (1) greater uncertainty (1) could discourage consumer spending / investment by firms (1) as households and firms could expect prices to fall further (1) if caused by a fall in total demand (1) could reduce output (1) and causing recession (1) firms make losses / go out of business (1) could cause more unemployment (1) and unemployment is already high at 18% (1) could increase a budget deficit (1) due to lower tax revenue from lower sales taxes / income taxes (1) increase in unemployment benefits (1). Reward but do not expect explanation of benign and malign deflation. Allow reference to demand-side deflation but not demand-pull deflation or cost-push deflation as they are not acceptable terms.