A bright future for Mongolia? Economists predict that the Asian economy of Mongolia will be the fastest growing economy between 2015 and 2020. In 2011, the country's economic growth rate was 21%. The forecast annual growth rate for 2015 to 2020 is 24%. The country is rich in a range of minerals including coal, copper, gold, silver and uranium. China purchases large quantities of these minerals. In 2011, there was a significant rise in the world demand for a range of minerals including copper. Some economists have pointed out that there are a number of risks attached to an economic boom caused by a rise in demand for minerals. One is the so-called ‘resources curse'. This refers to the disadvantage that can arise as natural resources are used. High international demand for minerals can push up the exchange rate and reduce the competitiveness of other industries. The extraction of minerals can also cause pollution. This is certainly the case in Mongolia. The capital city, Ulaanbaatar, is one of the most polluted cities in the world. The Mongolian economy faces a number of other problems. Its inflation rate is relatively high, reaching 10.6% in 2011, driven up by increases in food prices and rises in government spending. Its unemployment rate, at 10% in the same year, was above that of some of its Asian neighbours. This led it to being placed relatively high in the region's 'misery index'. This index, developed by the American economist Arthur Okun, adds together the unemployment rate and the inflation rate. Table 1 shows the unemployment rate, misery index and the interest rate for a number of Asian economies. Table 1: The unemployment rate, misery index and interest rate for selected Asian economies in 2011 | Country | Unemployment rate (%) | Misery index (%) (unemployment rate + inflation rate) | Interest rate (%) | |-----------|-----------------------|-------------------------------------------------------|-------------------| | China | 6.1 | 11.7 | 3.4 | | India | 10.8 | 19.8 | 8.4 | | Japan | 4.5 | 4.2 | 1.0 | | Malaysia | 3.1 | 6.4 | 3.0 | | Mongolia | 10.0 | 20.6 | 12.3 | Nearly 40% of Mongolia's population lives below the poverty line. However, with rising economic growth, income levels are increasing. Indeed, some economists are predicting that Mongolians will become very rich. Tax revenue will also rise, which will enable the government to increase its spending on, for instance, education. Higher spending on education will make it possible for children to spend more years in school.

Mark scheme

Marking points from the official mark scheme (May/June 2014). The mark or mark type is shown in brackets.

1. [3] 3 marks for increase in (real) GDP/country's output/national income/productive potential over time.
2. Or 2 marks for increase in (real) GDP/country's output/productive potential/national income.
3. Or 1 mark for reference to GDP/output/national income.
4. [2] 1 mark for recognising the likelihood that incomes/GDP will rise/economic growth will occur.
5. 1 mark for recognising the likelihood that years in school will increase/education will improve.
6. 1 mark for explaining the link to the composition of the HDI.
7. Note: a maximum of 2 marks.
8. [4] 1 mark for axes correctly labelled – price and quantity or P and Q.
9. 1 mark for original demand and supply curves correctly labelled.
10. 1 mark for demand curve shifted to the right.
11. 1 mark for correct equilibriums identified – either by lines drawn to both axes or equilibrium points clearly identified, e.g. E1 and E2.
12. [3] The Central Banks of countries set the interest rate/use monetary policy to control inflation (1).
13. Interest rates are set high/contractionary monetary policies may be introduced (1) to reduce spending/borrowing/encourage savings (1).
14. Intention is to reduce total (aggregate) demand (1).
15. Lower (aggregate) demand may reduce demand-pull inflation (1).
16. Note: a maximum of 3 marks.
17. [5] 1 mark for concluding yes it does or for recognising that all the information supports the view/the rank in terms of inflation rates is the same as the rank in terms of interest rates.
18. Up to 4 marks for supporting evidence/calculations, e.g.:
19. Mongolia has the highest inflation rate and the highest interest rate/Mongolia has a high inflation rate and high interest rate (1), inflation calculated as 10.6% (1).
20. Japan has the lowest inflation rate and the lowest interest rate/Japan has a low rate of inflation and low rate of interest (1), inflation calculated as -0.3% (1).
21. India has the second highest inflation rate and the second highest interest rate/India has a high inflation rate and high interest rate (1), inflation calculated as 9% (1).
22. Malaysia has the second lowest inflation rate and the second lowest rate/Malaysia has a low rate of inflation and low interest rate (1) and inflation rate is calculated as 3.3% (1).
23. Note: a maximum of 3 marks for correct calculations on inflationary rates given above.
24. Note: a maximum of 5 marks overall.
25. [6] Up to 4 marks for why it might:
26. 1 mark for identifying that it will increase export prices.
27. 1 mark for explaining that higher export prices are likely to reduce demand for exports.
28. 1 mark for identifying that it will reduce import prices.
29. 1 mark for explaining that reduced import prices are likely to increase demand for imports.
30. Up to 4 marks for why it might not:
31. 1 mark for identifying that quality of domestically produced products may rise.
32. 1 mark for explaining that a rise in quality of domestically produced products will make them more attractive to foreign buyers.
33. 1 mark for identifying that domestic inflation rate may fall.
34. Up to 2 marks for explaining that if the domestic inflation rate falls below that of rival countries (1), exports may still be relatively cheaper in the foreign market even though the exchange rate has risen (1).
35. Up to 2 marks for explaining that a reduction in the price of raw materials or capital goods could reduce domestic firms' costs (1) and so make them more price competitive (1).
36. 1 mark for identifying that labour productivity might rise.
37. Up to 2 marks for explaining that higher labour productivity will reduce costs of production (1), which may make exports relatively cheaper in the foreign markets even though the exchange rate has risen (1).
38. Up to 3 marks for explaining that in the case of products where a country has a monopoly (1) with an example of a monopoly (1) demand may not be significantly affected by a rise in price (1).
39. Reward, but do not expect, answers that discuss that the outcome will depend upon the PED of exports and imports.
40. Note: a maximum of 6 marks overall.
41. [2] 1 mark for recognising that it is due to pollution.
42. 1 mark for explaining that pollution is an external cost.
43. 1 mark for recognising that social costs are external costs plus internal costs/the existence of external costs will mean the social costs are higher than private costs.
44. [5] Up to 3 marks why it may:
45. Up to 2 marks: higher incomes can increase income tax revenue (1), how much tax revenue rises will be influenced by whether it is progressive or regressive (1).
46. Up to 2 marks: higher incomes can increase spending (1) and so increase sales tax revenue (1).
47. Up to 2 marks: higher incomes can increase firms' profits (1) and so increase corporation tax revenue (1).
48. Up to 2 marks: higher incomes can increase spending on imports (1) and so revenue from tariffs increases (1).
49. Up to 3 marks for why it might not:
50. Up to 2 marks: spending may not rise (1) if the additional income is saved (1).
51. Up to 2 marks: profits may not increase (1) if the extra spending goes on imports/costs rise as output increases/firms experience diseconomies of scale (1).
52. Up to 2 marks: tax rates/coverage may be cut (1) and so even with higher incomes tax revenue does not increase (1).
53. Up to 2 marks: tax avoidance and evasion may increase (1) and so for every 'dollar' earned/spent less revenue is collected (1).
54. Note: a maximum of 5 marks overall.