In March 2012, the Indian Government increased the tariff on imports of gold. It did this to reduce the country's growing deficit on the current account of its balance of payments.

Mark scheme

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

1. [4] 1 mark for recognising a tariff is a tax on imports.
2. 1 mark for a tariff increases importing firms' costs of production.
3. 1 mark for a tariff will reduce supply.
4. 1 mark for a tariff will raise price.
5. 1 mark for a tariff will reduce demand.
6. 1 mark for relevant reference to PED of imports.
7. Note: Accept a diagrammatic approach showing supply decreasing, price rising and demand falling for 3 marks.
8. [6] 1 mark for idea of the meaning of the current account/current account deficit.
9. 1 mark each for three causes identified:
10. • high exchange rate
11. • inflation
12. • low productivity
13. • high costs of production
14. • low quality of domestically produced products
15. • low incomes abroad
16. • high incomes at home
17. • protectionism abroad
18. • lack of protectionism at home.
19. 1 mark each for an analysis of three causes:
20. • high exchange rate would mean high export prices and low import prices
21. • inflation makes domestic products less price competitive
22. • low productivity of labour will raise wage costs/high prices of domestic products
23. • high costs of production e.g. raw material cost/results in high prices of domestic products
24. • low quality reduces demand for exports and raises demand for imports
25. • low incomes abroad may result in low demand for exports
26. • high incomes at home may lead to high demand for imports
27. • protectionism abroad e.g. tariffs make it difficult to export
28. • absence of protectionism at home may result in e.g. dumping.
29. [10] Up to 7 marks for why it should:
30. Up to 5 marks for: may indicate a poor economic performance [1] low demand for country's products [1] may be result of high inflation [1] poor quality products [1] low productivity [1].
31. Up to 3 marks for: will reduce total demand [1]and so may increase unemployment [1] and lower GDP [1].
32. Up to 3 marks for: may lead the country into debt [1] interest will have to be paid [1] this will involve an opportunity cost [1].
33. Up to 7 marks for why it should not:
34. Up to 5 marks for: may move later to a surplus [1] if imports are of raw materials [1] and capital goods [1] may be used to produce products to replace imports [1] and to be exported [1].
35. Up to 3 marks for: may be short term [1] especially if caused by falling incomes abroad [1] will be reduces when incomes rise [1].
36. Up to 2 marks for: may be a relatively small deficit [1] and/or may last for a short time [1].
37. Up to 2 marks for: there may be more serious macroeconomic problems [1] e.g. rising unemployment [1].
38. Maximum of 5 marks for a list-like response.