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EconomicsExams

Task: Analysis and Evaluation

1.Analysis: Explain why inflation rates may differ between countries.

2.Evaluation: Evaluate the view that low inflation should no longer be the top priority for macroeconomic policy

Building an Essay AnswerCrisp & accurate

definitions

1 key point per paragraph

+Supporting examples /

evidence / diagrams+evaluate as you go

Evaluative conclusions

Analysis: Explain why inflation rates may differ between countries (15 marks)

• 20 minutes for this question• Start with clear and brief

definition of inflation• This is a question about

causation• You may have time to develop

(briefly) only three or four points

• Support with AD/AS analysis• Apply with examples / evidence

Definition of inflation

• Sustained increase in the aggregate or general price level of the economy.

• Weighted basket of goods and services• UK (CPI) target inflation of 2%, +- 1%• Quote data from the exam source / extract –

easy marks, often missed by students

CPI inflation for selected countriesConsumer prices indices, annual percentage change

Consumer Price Inflation for Selected Countries

Spain United Kingdom Japan Hungary

Source: Reuters EcoWin

05 06 07 08 09 10

-2

-1

0

1

2

3

4

5

6

7

8

Pe

rce

nt

-2

-1

0

1

2

3

4

5

6

7

8

Spain

UK

Japan

Hungary

Annual inflation ratesPercentage change in consumer prices, source: IMF

Annual Inflation Rates

Developing Countries World

Source: Reuters EcoWin

96 97 98 99 00 01 02 03 04 05 06 07 08 090.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

Pe

rce

nt

pe

r An

nu

m

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

The World Economy

Developing Countries

Explaining differences in inflation

Short term causes1.Strength of growth / “demand-pull” factors2.Asset price inflation feeding into wealth –

domestic demand – prices3.Changes in commodity prices (e.g. oil, gas and

food-stuffs)4.Changes in the exchange rate (changes in

import prices)

Explaining differences in inflation

Medium term causes1. Productivity (affects unit labour costs)2. Intensity of domestic & external competition3. Differences in inflation expectations (affects

wage demands, NAIRU et al)4. Credibility/success of monetary and fiscal

policies in managing AD / boosting LRAS

Evaluate the view that low inflation should no longer be the number one priority for macroeconomic

policy (25 marks)

You have around 40 minutes for this evaluation question

Consider using a writing frame in your revisionKnowledge Be clear what low inflation means

Price stability – low inflation of 1-4% per yearBriefly explain why inflation control has been seen as a key macro policy objective

–Business confidence and investment spending–Competitiveness and trade performance (X-M)–Avoiding economic/social costs of high inflation–Seen as a pre-condition for achieving other objectives

Analysis Point 1 Diagram

Point 2Diagram

Point 3Diagram

Application Application to context 1

Application to context 2

Application to context 3

Evaluation Evaluation 1 Evaluation 2 Concluding paragraph with balanced conclusion

Is it time to change the inflation target?Annual % change in the Consumer Price Index

UK Consumer Price Inflation

Source: UK Statistics Commission

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Pe

rce

nt

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

CPI Inflation target = 2%

Is it time for a change of policy objective?

• Current economic crisis1. Inflation less of a priority

• Plenty of spare capacity• Businesses have little pricing power• Workers have weak bargaining power

2. Avoiding depression and price deflation3. Avoiding the damaging effects of high

unemployment4. High levels of consumer & govt debt5. Is there a case for allowing higher inflation?

Low inflation should no longer be the number one priority for macroeconomic policy

Knowledge

Analysis Inflation less of a priority given the big picture. Lots of spare capacity. Lots of competition, little wage bargaining power for workers.

Application Growth figuresUnemployment

Evaluation

WEE STEPS to Evaluation

W

E

E

S

T

E

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E

E

S

T

E

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E

S

T

E

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E Equality – Do some parties benefit more/less than others?

S

T

E

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E Equality – Do some parties benefit more/less than others?

S Scope – How many people are affected by the point? Is it wide reaching or narrow?

T

E

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E Equality – Do some parties benefit more/less than others

S Scope – How many people are affected by the point? Is it wide reaching or narrow?

T Time – How long will it last, SR or LR or both?

E

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E Equality – Do some parties benefit more/less than others

S Scope – How many people are affected by the point? Is it wide reaching or narrow?

T Time – How long will it last, SR or LR or both?

E Effectiveness – does it solve the issue that it was intended to solve?

P

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E Equality – Do some parties benefit more/less than others

S Scope – How many people are affected by the point? Is it wide reaching or narrow?

T Time – How long will it last, SR or LR or both?

E Effectiveness – does it solve the issue that it was intended to solve?

P Prioritisation – which of your points is the strongest and why. Be specific about the context of the question

S

WEE STEPS to Evaluation

W Wider context – consider the bigger picture and use it to weight your arguments

E Efficiency – Does this achieve a more/less efficient allocation of resources?

E Equality – Do some parties benefit more/less than others

S Scope – How many people are affected by the point? Is it wide reaching or narrow?

T Time – How long will it last, SR or LR or both?

E Effectiveness – does it solve the issue that it was intended to solve?

P Prioritisation – which of your points is the strongest and why. Be specific about the context of the question

S Scale or Magnitude – where people are affected how strong is the impact?

Low inflation should no longer be the number one priority for macroeconomic policy

Knowledge

Analysis Inflation less of a priority given the big picture. Lots of spare capacity. Lots of competition, little wage bargaining power for workers.

Application Growth figuresUnemployment

Evaluation Time scale – right now the change may be sensible, but if we come away from an inflation target what may happen in the long run? Investment? Stability? We still have cost-push inflation danger!

Consider using a writing frame in your revisionKnowledge

Analysis Avoiding depression and price deflation.Deflation and its costs –Downwards demand spiral.

Increasing size of real debt, damage to savings.

Application Japanese growth 1990’s.Diagram showing negative multiplier/accelerator.

Evaluation Wider context – How significant a threat is there of deflation in the economy today? Confidence rising, growth rate returning. Is there not a greater risk that avoiding deflation will allow inflation to get out of control. Don’t we already target deflation? We still have cost-push inflation!

Consider using a writing frame in your revisionKnowledge

Analysis Target should be debt reduction. Debt means increased tax, decreased investment, decreased consumption. Increased cost of borrowing.

Application Government debt at 62% and predicted to rise.Danger to credit rating. Cite Greece with debt over 110% and junk bond rating. AD & LRAS analysis diagram showing shifts inwards in both due to lack of investment and government spending.

Evaluation

Consider using a writing frame in your revisionKnowledge

Analysis Target should be debt reduction. Debt means increased tax, decreased investment, decreased consumption. Increased cost of borrowing.

Application Government debt at 62% and predicted to rise.Danger to credit rating. Cite Greece with debt over 110% and junk bond rating. AD & LRAS analysis diagram showing shifts inwards in both due to lack of investment and government spending.

Evaluation Prioritisation – Recognition that short-term risks of spiralling debt may outweigh cost of inflation, inflation also reduces debt in real terms. Perhaps medium term inflation is a better objective.

Good evaluation phrases to use

• However• Hence• Nevertheless• Although• It is likely that• The tendency is• But• In retrospect

Good evaluation phrases to use

• With the benefit of hindsight

• On the other hand• In the short run ……..

but in the long run• It depends upon• The data suggest that• According to the

extract

W Wider context

E Efficiency

E Equality

S Scope

T Time

E Effectiveness

P Prioritisation

S Scale or Magnitude

Eight wee steps to great evaluation

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