Peru and Panama Between 2005 and 2012, Peru and Panama experienced the fastest economic growth rates in the Americas. The two countries differ in the size of their populations and the size of their economies. In 2013, Peru had a population of 30 million and a Gross Domestic Product (GDP) of US340 billion. In contrast, Panama had a population of 3.6 million and a GDP of US60 billion. Life expectancy was higher in Panama with people, on average, living three years longer than in Peru. Between 2008 and 2013, Peru had an average annual inflation rate of 2.7%. This was, in part because of careful control of the country's interest rate and exchange rate by Peru's Central Bank. Panama does not have a central bank and experienced a different average annual inflation rate (see Fig. 1). [Figure 1: The inflation rate in Panama, 2008-2013] Between 2008 and 2013, the unemployment rate fell more in Panama than in Peru. The decline in Panama's unemployment rate was largely due to the building work being undertaken on a seven-year project to enlarge the Panama Canal. The lower unemployment rate enjoyed by Panama was one of the reasons why the level of poverty was lower than in Peru in 2013. Peru experienced a trade in goods surplus whilst Panama had a trade in goods deficit. Both countries export gold and fish and import oil and cars. For both countries, the USA, China and Japan are important trading partners. About 75% of workers in Peru are employed in the service (tertiary) sector compared with 80% in Panama. Among Panama's key service industries are insurance and banking. Panama has the largest insurance market in Central America. The number of companies in the market, including multinational companies, is increasing. This is making the market more competitive. Multinational companies also operate in the country's banking sector. It has a number of private sector commercial banks. It does not have a central bank and, therefore, does not have direct government regulation of its banking sector. Recent years have seen an increase in the average size of the commercial banks. There is some debate about whether larger banks benefit their customers.

Mark scheme

Marking points from the official mark scheme (May/June 2015). The mark or mark type is shown in brackets.

1. [2] (a) • higher GDP per head/average income (1) • higher life expectancy (1)
2. [2] (b) (i) The price level rose (1) at a lower rate in 2009/at a higher rate in 2008 (1).
3. [2] (ii) 2013 (1) as price level rose every year/there was inflation throughout the period (1)
4. [4] (c) • the average inflation rate was higher in Panama (1) it was approximately 5% in Panama (1) • the implication is that Panama's inflation rate is less stable than Peru's (1) an unstable inflation rate can make planning more difficult/may discourage investment and saving (1) • a higher inflation rate may make a country's products less internationally competitive (1) worsening the trade position (1) • a higher inflation rate may discourage MNCs setting up in the country/discourage investment (1) reducing potential output/employment (1) • a higher inflation rate may result in greater costs to consumers (1) lower purchasing power (1) • a higher inflation rate may create costs for firms (1), e.g. administrative costs (1) • a higher inflation rate may disadvantage savers (1) but reward borrowers (1) • a higher inflation rate may increase unemployment (1) increasing costs of unemployment/result of lower demand for products (1) • a higher inflation rate may reduce unemployment (1) if it is the result of increased total demand (1) • a higher inflation rate may indicate a less successful monetary policy (1), e.g. not good use of interest rate/exchange rate/money supply changes (1) Note: candidates may answer the question by explaining the benefits to Peru of having a lower inflation rate. Note: 1 mark is reserved for recognising higher inflation in Panama/lower inflation rate in Peru.
5. [5] (d) Up to 3 marks for why it might: • a lower unemployment rate may mean that more people are in work (1) • more employment may mean higher incomes (1) more people earning may reduce relative poverty (1) • more people will have access to basic necessities/enjoying more goods and services (1) being able to enjoy more products may increase living standards (1) access to more goods and services should reduce absolute poverty (1) • more people will be able to afford education/health care (1) increasing their earning potential and the earning potential of their children (1) • lower unemployment can increase tax revenue/reduce spending on welfare benefits (1) government may be able to spend more on, e.g. education and health care, which can reduce poverty (1) Up to 3 marks for why it might not: • a fall in unemployment may not increase the number of people employed (1) the rate may have fallen because some of those who were previously unemployed may have retired/emigrated/entered education (1) • a reduction in unemployment may raise the wages of skilled workers more than unskilled workers (1) increasing relative poverty (1) • the resulting higher demand may result in inflation (1) wages may rise by less than prices (1) leading to a fall in real incomes (1) which may increase poverty (1) • other causes of poverty may increase (1), e.g. increase in sickness/increase in the number of dependants/reduction in skills (1) • some people may earn very low wages (1) which may be less than they received in benefits (1)
6. [5] (e) • specialising allows countries to concentrate on what they are best at (1) influenced by factor endowment (1) • specialisation can reduce the (average) costs of production (1) raise productivity (1) efficiency (1) enabling lower prices to be charged (1) • specialisation could increase export revenue/improve trade position (1) • specialisation can increase output/income/GDP (1) • specialisation can improve the quality of output (1) • higher output/income/GDP may raise living standards (1) • increasing the size of the market (1) can lead to economies of scale (1) • countries may import products from countries that can produce them more efficiently (1) • countries may import products to gain a greater variety of goods and services (1) • countries may import products they cannot produce themselves (1) Note: reward reference to comparative advantage and/or absolute advantage (max 2 marks) but do not expect it.
7. [4] (f) One mark for each of two relevant identifications and one mark for each of two explanations: • may set interest rates/operates monetary policy (1) to influence the level of demand in the economy/keep inflation rate within target (1) • may influence the exchange rate (1) by buying and selling the currency/using reserves/ changing the interest rate (1) • regulates the banking system (1) it will try to ensure banks follow sound policies (1)
8. [6] (g) Up to 4 marks for why it might: • a larger commercial bank may be more financially sound (1) less likely to go out of business (1) • a larger bank may have more funds available (1) this may enable customers to borrow more (1) • a larger commercial bank may be able to take advantage of economies of scale (1) example (1) this will reduce costs of production (1) with lower costs, the bank may lower the interest it charges borrowers/reduce prices to customers (1) increase interest rate it pays savers (1) • a larger bank may open more branches (1) have longer opening hours (1) • a larger bank may be more able to invest in new technology (1), e.g. online banking (1) • a larger commercial bank may offer a greater range of services (1) a better quality of services (1) take greater advantage of risk bearing economies of scale (1) Up to 4 marks for why it might not: • a larger commercial bank may have more market power/may have become a monopoly (1) it may have grown by eliminating competition (1) this may result in it charging higher interest to borrowers/increase price (1) lower interest rate it pays to savers (1) lower the quality of its services (1) • a larger commercial bank may experience diseconomies of scale (1) example (1) this will raise costs of production (1) this may lead the bank to increase interest rate charged to borrowers/price (1) lower the interest rate it pays savers (1) reduce quality of services (1)