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 40marks and Section B has 20 marks.

You are reminded that assessment will take into account the quality of written communication used inanswers that involve extended writing (Section B).

You are reminded that the essay questions in Section B are synoptic and so will test understanding ofthe connections between the different elements of the subject.

GCE A level

1134/01

ECONOMICS – EC4

A.M. FRIDAY, 25 June 2010

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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 ayear; of this, £8bn is spent by visitorsarriving at one of the five main Londonairports.

• Twenty per cent of the UK’s exports now goby air.

• The aviation industry directly provides jobsfor more than 180,000 people in the UK andcontributes more than £10 billion to GDP.

• Air freight flights emit approximately 100times more carbon dioxide per tonne kmflown than rail or sea transport and 8 timesmore than road freight.

• On average, only 78 per cent of seats oninternational flights, and 65 per cent ondomestic flights, are filled.

Source: Liberal Democratic Party briefing

The Competition Commission today signalled the break up of BAA, (formerly known as theBritish Airports Authority), owner of seven UK airports when it called for the company to beforced to sell off three of its airports, including two in London. It said it had found competitionproblems at all seven of BAA’s airports, adding that these could best be tackled by the sale of twofrom Heathrow, Gatwick and Stansted as well as either Glasgow or Edinburgh.

The Competition Commission is concerned about a lack of competition between airports in thesouth-east of England and central Scotland, and says BAA’s common ownership of airports inthese regions is largely to blame. It believes this has contributed to a poor level of service topassengers 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 extrarunways. 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 lowercharges.

When the Government privatised BAA in 1987 a key objective in keeping it intact was to ensurethe provision of adequate airport capacity to meet an expected growth in demand. More than 20years later, there is inadequate capacity in the south-east.

BAA’s Colin Matthews said criticising the company for not delivering new capacity was unfairbecause the Government had delayed granting planning permission for new terminals and runwaysfor many years.

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“Just as the Government is about to make the decisions that could lead to the first full lengthrunways being built in the south-east since the second world war, the Commission risks creatinguncertainty, delay and confusion at exactly the wrong time.”

Trade unions representing airport workers expressed concern about the Commission’s 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 andcan use.”

Response from airlines was mixed. Ryanair’s Jim Callaghan said the low-cost carrier was fullybehind the report’s conclusions. “Competition works; monopolies don’t. BAA’s monopoly controlover the London airports has been bad for competition and consumers. BAA has long ignored theneeds of its airline users and the travelling public and provided inefficient facilities.” VirginAtlantic said BAA “still acted like a monopoly” and had neglected much-needed improvements atGatwick, focusing instead on Heathrow.

The Department for Transport has rejected the approach of simply expanding airports to meetforecast demand. Instead it has set out a framework which takes account of the need for sustainablegrowth 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 includeManchester Airports Group, which already owns Manchester and Bournemouth Airports andGlobal 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 andnew routes could be good news for passengers. People may have more options for where they flyfrom and airlines seeking to increase business could choose to do so by cutting fares. Neverthelesssome 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 fromHeathrow.

Many of the UK’s airports are already at bursting point. When the British Airports Authority wasprivatised in 1987 and became BAA, control of all the London airports was kept together to ensuresufficient capacity improvements. But after more than two decades, the UK aviation industry stillsuffers 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 todraw 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 fuelcosts, the proportion becomes even smaller. Even if lower fees were passed on the effect wouldmost likely be very small.

BAA says the only way to improve the situation is to boost capacity, which is only possible withthe backing of government planning policy. The Competition Commission argues that rivalry fromnearby airports will force operators to improve the customer service experience - increasing thenumber of security staff to speed up customs and immigration checks, for example, or investing inmore 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 ManchesterAirports Group) wish to take over some of BAA’s airports? [8]

(c) To what extent are passengers likely to benefit from the proposed break-up of BAA’smonopoly? [12]

(d) Discuss whether Government economic policy should focus upon reducing air travel ratherthan 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 % ofGDP 1974-2013

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As Chancellor of the Exchequer, Gordon Brown used to boast about how brilliantly the economywas performing with him in charge. A sustained period of stable growth was supposedly thelongest for more than two centuries.

Alistair Darling, who took over the Treasury in June 2007, must feel differently. The projections inhis 2009 budget show not only that the fall in national output in 2009 will be the biggest since1980, but also that the budget deficit as a share of the economy, both this fiscal year and next, willbe 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 severalmajor banks from collapsing. Not surprisingly the pound has begun to slide (see Figure 2) asinternational investors sold sterling on the foreign exchange markets.

International investors had good reason to take fright. The economy was exposed to the creditcrisis through London’s importance as an international financial centre. British households had runup a huge debt after a long borrowing boom. The rise in British house prices during the boomyears 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 bigeconomies - notably Japan and Germany - were falling farther. Their export-driven economieswere particularly exposed to the global downturn that followed last autumn’s financial panic.

The International Monetary Fund (IMF) has predicted that Britain will see a 4.1% decline in GDPin 2009. But even that was surpassed by Japan and Germany suffering projected falls in GDPduring 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 inBritain. The housing market is now starting to recover a bit. Stocks of goods have been run downfast, which suggests that the economy will be among the first to benefit once companies startmeeting 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 ofpeople claiming benefits rose by 73,700 in March. The jobless rate rose to 6.7%, up from 5.2% inMarch 2008. Even so, Britain does look set to fare less badly than was once feared. The bankingsystem has been stabilised for the time being - though at a big potential cost to the taxpayer.

Britain’s economic prospects may not be as bad as they may seem, however, because other G7countries are in a worse situation. In a global downturn caused by plummeting demand forinvestment goods, electronics and expensive consumer items like cars, it has been the countriesspecialising in producing these things that have suffered the most. Britain has been less affectedbecause 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, lessvulnerable 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 inforeign markets. Exports of goods fell in volume terms by almost 14% in the year to February. Butother 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 benefitingdomestic 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: thefall in sterling, a dramatic easing in monetary policy (via lowering interest rates and increasedmoney supply) and some fairly large fiscal support for the banking system. This mix of measuresseems 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 certainlylook set to be. On figures from the IMF this week, Britains’s budget deficit in 2010 will be thehighest as a share of national output in the G7. When he was Chancellor, Gordon Brown set a fiscalrule to keep public net debt below 40% of GDP. The new budget revealed that the debt burden willdouble 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”. (Page7 line 10) [8]

(b) Explain, using a diagram, the effect that the selling of sterling had upon the pound’sexchange rate in 2009. [8]

(c) Discuss whether the Government’s decision to increase its borrowing was an appropriatepolicy. [12]

(d) “Britain’s economic prospects may not be as bad as they may seem, however, because otherG7 countries are in a worse situation.” (Page 7 lines 29 - 30). How far does this appear to betrue?

[12]

SECTION B

Answer one question from this section.

3. Discuss the view that rapid economic growth should be the Government’s main macroeconomicpriority. [20]

4. “Competition from low-cost economies such as India and China makes it essential for theEuropean 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 Governmentspending and encourage private enterprise. [20]

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