LH*(S10-1134-01)

ADDITIONAL MATERIALS
In addition to this examination paper, you will need a 12 page answer book.
INSTRUCTIONS TO CANDIDATES
Answer one question from Section A.
You are advised to spend no more than 1 hour and 15 minutes on Section A.
Answer one question from Section B.
INFORMATION FOR CANDIDATES
The number of marks is given in brackets at the end of each question or part-question. Section A has 40
marks and Section B has 20 marks.
You are reminded that assessment will take into account the quality of written communication used in
answers that involve extended writing (Section B).
You are reminded that the essay questions in Section B are synoptic and so will test understanding of
the connections between the different elements of the subject.
GCE A level
1134/01
ECONOMICS EC4
A.M. FRIDAY, 25 June 2010
2 hours
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SECTION A
Answer one question from this section.
1. Study the information below and then answer the questions that follow.
BAA must sell three UK airports, watchdog rules
Briefing: Some Facts About Aviation
Visitors to the UK spend around 11bn a
year; of this, 8bn is spent by visitors
arriving at one of the five main London
airports.
Twenty per cent of the UKs exports now go
by air.
The aviation industry directly provides jobs
for more than 180,000 people in the UK and
contributes more than 10 billion to GDP.
Air freight flights emit approximately 100
times more carbon dioxide per tonne km
flown than rail or sea transport and 8 times
more than road freight.
On average, only 78 per cent of seats on
international flights, and 65 per cent on
domestic flights, are filled.
Source: Liberal Democratic Party briefing
The Competition Commission today signalled the break up of BAA, (formerly known as the
British Airports Authority), owner of seven UK airports when it called for the company to be
forced to sell off three of its airports, including two in London. It said it had found competition
problems at all seven of BAAs airports, adding that these could best be tackled by the sale of two
from Heathrow, Gatwick and Stansted as well as either Glasgow or Edinburgh.
The Competition Commission is concerned about a lack of competition between airports in the
south-east of England and central Scotland, and says BAAs common ownership of airports in
these regions is largely to blame. It believes this has contributed to a poor level of service to
passengers and airlines because it reduces incentives for improvements.
BAA, it says, has been slow to develop new routes and invest in new terminals and push for extra
runways. It says that some airports, not owned by BAA, such as Manchester and London City,
have been more responsive to customers needs and have managed to both expand and lower
charges.
When the Government privatised BAA in 1987 a key objective in keeping it intact was to ensure
the provision of adequate airport capacity to meet an expected growth in demand. More than 20
years later, there is inadequate capacity in the south-east.
BAAs Colin Matthews said criticising the company for not delivering new capacity was unfair
because the Government had delayed granting planning permission for new terminals and runways
for many years.
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Turn over.
Just as the Government is about to make the decisions that could lead to the first full length
runways being built in the south-east since the second world war, the Commission risks creating
uncertainty, delay and confusion at exactly the wrong time.
Trade unions representing airport workers expressed concern about the Commissions proposals.
Garry Graham, aviation secretary for Prospect Union, which represents many BAA workers, said:
In reality, many of the travelling public have little choice as to the airports they are served by and
can use.
Response from airlines was mixed. Ryanairs Jim Callaghan said the low-cost carrier was fully
behind the reports conclusions. Competition works; monopolies dont. BAAs monopoly control
over the London airports has been bad for competition and consumers. BAA has long ignored the
needs of its airline users and the travelling public and provided inefficient facilities. Virgin
Atlantic said BAA still acted like a monopoly and had neglected much-needed improvements at
Gatwick, focusing instead on Heathrow.
The Department for Transport has rejected the approach of simply expanding airports to meet
forecast demand. Instead it has set out a framework which takes account of the need for sustainable
growth and local social and environmental considerations.
Virgin Atlantic says it is planning a bid for Gatwick Airport. Ryanair would like to buy Stansted,
from where many of its flights depart and arrive. Other companies linked with the airports include
Manchester Airports Group, which already owns Manchester and Bournemouth Airports and
Global Infrastructure Partners, part-owner of London City airport.
Is this all good news for passengers?
In theory, a situation in which Heathrow, Gatwick and Stansted compete directly for business and
new routes could be good news for passengers. People may have more options for where they fly
from and airlines seeking to increase business could choose to do so by cutting fares. Nevertheless
some people have little choice about where they travel from while, whatever happens to Gatwick,
Stansted and Edinburgh, the bulk of transatlantic and Far East flights will still depart from
Heathrow.
Many of the UKs airports are already at bursting point. When the British Airports Authority was
privatised in 1987 and became BAA, control of all the London airports was kept together to ensure
sufficient capacity improvements. But after more than two decades, the UK aviation industry still
suffers from massive overcrowding.
Will flights cost less?
While a new owner of, say, Gatwick, might try to attract new routes or bring down landing fees to
draw trade from nearby rivals, the impact on individual passengers is likely to be minimal.
Landing charges make up only a small share of airlines costs, and as rising oil prices increase fuel
costs, the proportion becomes even smaller. Even if lower fees were passed on the effect would
most likely be very small.
BAA says the only way to improve the situation is to boost capacity, which is only possible with
the backing of government planning policy. The Competition Commission argues that rivalry from
nearby airports will force operators to improve the customer service experience - increasing the
number of security staff to speed up customs and immigration checks, for example, or investing in
more interesting leisure options for passengers waiting for flights.
Adapted from the Guardian, BBC News 20 August 2008
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(a) With reference to the data, explain the arguments for forcing BAA to sell three airports. [8]
(b) Why might some airlines (such as Ryanair) and airport owners (such as Manchester
Airports Group) wish to take over some of BAAs airports? [8]
(c) To what extent are passengers likely to benefit from the proposed break-up of BAAs
monopoly? [12]
(d) Discuss whether Government economic policy should focus upon reducing air travel rather
than encouraging expansion of airport capacity. [12]
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BLANK PAGE
Questions continue on page 6
Turn over.
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2. Study the information below and then answer the questions that follow.
Britain after the 2009 Budget
The Budget lays bare the fiscal cost of a savage downturn
Figure 1 GDP growth and budget
balance 1969-2011
Figure 2 - Sterling exchange rate 1975-2009
Figure 3 - GDP growth in G7 countries 2009-10
Figure 4 Public sector debt as % of
GDP 1974-2013
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As Chancellor of the Exchequer, Gordon Brown used to boast about how brilliantly the economy
was performing with him in charge. A sustained period of stable growth was supposedly the
longest for more than two centuries.
Alistair Darling, who took over the Treasury in June 2007, must feel differently. The projections in
his 2009 budget show not only that the fall in national output in 2009 will be the biggest since
1980, but also that the budget deficit as a share of the economy, both this fiscal year and next, will
be the largest since then (see Figure 1). This year the Government will be borrowing a breathtaking
175 billion, worth 12.4% of GDP. At the same time the Government has had to rescue several
major banks from collapsing. Not surprisingly the pound has begun to slide (see Figure 2) as
international investors sold sterling on the foreign exchange markets.
International investors had good reason to take fright. The economy was exposed to the credit
crisis through Londons importance as an international financial centre. British households had run
up a huge debt after a long borrowing boom. The rise in British house prices during the boom
years had been among the most extreme internationally. The bubble looked certain to burst.
Although the British economy seemed in trouble, it became clear in late 2008 that other big
economies - notably Japan and Germany - were falling farther. Their export-driven economies
were particularly exposed to the global downturn that followed last autumns financial panic.
The International Monetary Fund (IMF) has predicted that Britain will see a 4.1% decline in GDP
in 2009. But even that was surpassed by Japan and Germany suffering projected falls in GDP
during 2009 of 6.2% and 5.6% respectively (see Figure 3).
In recent weeks there have been some signs that the worst of the recession may soon be over in
Britain. The housing market is now starting to recover a bit. Stocks of goods have been run down
fast, which suggests that the economy will be among the first to benefit once companies start
meeting demand from new production rather than using existing stocks.
There is still a lot of economic pain to come, not least in rising unemployment. The number of
people claiming benefits rose by 73,700 in March. The jobless rate rose to 6.7%, up from 5.2% in
March 2008. Even so, Britain does look set to fare less badly than was once feared. The banking
system has been stabilised for the time being - though at a big potential cost to the taxpayer.
Britains economic prospects may not be as bad as they may seem, however, because other G7
countries are in a worse situation. In a global downturn caused by plummeting demand for
investment goods, electronics and expensive consumer items like cars, it has been the countries
specialising in producing these things that have suffered the most. Britain has been less affected
because manufacturing makes up only 13% of the economy, compared with shares of around 20%
for Germany and Japan. Moreover, industries such as pharmaceuticals and aerospace, less
vulnerable to recessionary falls in demand, are especially important in Britain.
The competitive edge that this has given British exporters is being blunted by the collapse in
foreign markets. Exports of goods fell in volume terms by almost 14% in the year to February. But
other countries have suffered far more: in Japan, exports nosedived by 45% over the same period.
The weak pound is supporting the economy by making exports more profitable and benefiting
domestic producers who compete with imports in the home market.
What this means is that the ailing British economy has had three powerful doses of medicine: the
fall in sterling, a dramatic easing in monetary policy (via lowering interest rates and increased
money supply) and some fairly large fiscal support for the banking system. This mix of measures
seems likely to keep GDP from falling as far as in some other big countries.
The economy itself may not prove the worst-performing in the G7, but the public finances certainly
look set to be. On figures from the IMF this week, Britainss budget deficit in 2010 will be the
highest as a share of national output in the G7. When he was Chancellor, Gordon Brown set a fiscal
rule to keep public net debt below 40% of GDP. The new budget revealed that the debt burden will
double to almost 80% by 2013-14 (see Figure 4).
Adapted from, The Economist 23 April 2009
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(a) Explain why international investors sold sterling on the foreign exchange markets. (Page
7 line 10) [8]
(b) Explain, using a diagram, the effect that the selling of sterling had upon the pounds
exchange rate in 2009. [8]
(c) Discuss whether the Governments decision to increase its borrowing was an appropriate
policy. [12]
(d) Britains economic prospects may not be as bad as they may seem, however, because other
G7 countries are in a worse situation. (Page 7 lines 29 - 30). How far does this appear to be
true?
[12]
SECTION B
Answer one question from this section.
3. Discuss the view that rapid economic growth should be the Governments main macroeconomic
priority. [20]
4. Competition from low-cost economies such as India and China makes it essential for the
European Union to introduce protectionist measures against imports from these countries.
Discuss. [20]
5. Discuss whether the best way for poor developing countries to grow is to cut Government
spending and encourage private enterprise. [20]
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