Maximising your mark 1

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The VCE Economics exam is, by Economics education standards, odd. There are several problems and I can’t deal with them all in detail now. However in summary:

The mark schemes are not published making it difficult to identify where marks are allocated.

The written response questions are actually quite easy making it difficult to distinguish between candidates.

The multiple choice section has a disproportionate impact on the exam score.

Using the time properly to make a difference

People often use the reading time to work through the MC section, some marking the paper with fingernails so they complete it quickly when the exam time starts. I think this is a major mistake.

The marks earned in the written section tend to ‘bunch’ because the questions are both quite predictable and short. It is relatively easy to score most of the marks here. This means there are not big differences between good and average candidates in this section.

This makes the differences on the MC section much more significant – the MC sections contribution to variance is around DOUBLE its share of total marks.

Therefore the correct tactics for the exam should not be to complete the MC as quickly as possible. Rather candidates need to try to score the maximum on the MC section – a quite rare achievement - and look for the additional difficult marks in the written section.

I will look at specific tactics in the next two posts for the different sections, but my advice is.

1. Use the reading time for the written section, concentrating on the longer questions, which require more planning. Everyone rushes while they are writing and often skip the really important thinking stage of an answer, especially towards the end.

Think about the likely structure of the longer answers and the possible content.

2. Make sure you understand the likely mark structure of the exam questions so that you can provide the correct structure to an answer. There is no point writing more than is necessary to gain a mark.

3. Spend enough time to answer the MC questions correctly. Don’t rush through them, as there are frequently elephant traps in the questions. The wrong answers are actually called ‘distracters’ for a reason.

I will run through some MC questions in my next post.

Summary of Australian Economic data

Here is some data to remember for the VCE Economics exam.

Remember - the last four years only required and you need to look at TRENDS not the specific minor variations.

Growth has fluctuated over the period. In 2008/9 the primary influence was the GFC and the fall in demand from the rest of the world. The period feom 2010 is most strongly influenced by Chinese growth and the strength of the dollar. Currently growth is moderating and this is due to slower Chinese growth and falling commodity prices. Therefore Demand Side factors have dominated.

Unemployment rose at the onset of the GFC but then moderated to fluctuate a little around FULL EMPLOYMENT at 5%. The principle influences are demand side factors and immigration.

 

Employment has risen, quickly as the effects of the GFC were overcome and then very slowly since late 2010, but clearly on an upward trend. This suggests the small variations in unemployment are not major causes for concern.

Inflation has risen steadily, but the rate has moderated since mid 2011. The concerns about future growth (such as Chinese growth slowing) and the lower rate of inflation itself has allowed the RBA to lower interest rates. Remember that interest rates take up to two years to take their full effect on inflation so it could be argued that the RBA has acted too late.

Monetary policy does seem to have lagged behind changes in the inflation rate. Central banks try to keep 'ahead of the game' and we would expect to see interest rates falling before the rate of inflation turns up or down, not at the time as we see here. Low marks for the RBA on this one.

 The exchange rate is influenced by many factors, but in Australia's case the price and quantity of mineral exports and the relatively high Australian interest rates (The UK and USA have had rates of 0.5% for almost the whole period) have been the primary influences. The high exchange rates have made Australian exports less competative abroad, while it has raised the value of exports from the resources sector.

 

Australia has run a current account deficit since the mid 1970's. Adjusting the figures to a percentage of GDP gives the best indication of relative trade performance. The mineral resources boom has helped close the size of the deficit steadily, although Australia continues to run a deficit, meaning that foreign debt will inevitably rise.

 

However exteral debt has not risen much and as a proportion of GDP has increased hardly at all.

 

The budget has been in deficit and is currently in a contractionary stance.  The Government wants to return to surplus for reasons that are difficult to explain. Possibly they worry about the debt burden in the future.

 

Despite this clear upward trend Australia has one of the lowest public sector deficits and debts in the OECD. 

I hope these snapshots of the data will be useful.

An update on the carbon tax of $23 a tonne introduced on July 1st. The aim was to help Australia reduce carbon emissions and meet its 5% reduction target by 2020 (UK target is 50% by 2020 and  80% by 2050 - just saying).

The point of a tax is to raise the price and reduce consumption. By getting people to change the pattern of their expenditure toward the relatively cheaper, lower carbon, goods and services Australian carbon emissions will fall.

By far the biggest contributor to Australian carbon emissions is electricity generation. Australia uses a lot of very dirty coal (especially in Victoria) which has been likened to environmental terrorism. The first data available shows us that there has been a significant change in the use of electricity.

One reason is that there has been quite a take up in solar showers. This reduces an important fraction of daily electricity use, as long as the weather is reasonable of course. So less electricity needs to be generated.

The other effect in the market is the move away from coal by the generators. This is exactly why the carbon tax was introduced.

Environmental policy is likely to come up in this years VCE Economics exam. Assessing the policy as well as understanding how it works and its details is important. This artile suggests that it has been effective far beyond the claims of its detractors.

The Age gives details of the change in power generation.

Difficulty of data

Another well known VCE Economics site looked at supply side factors recently. The article pointed out that the participation rate (the percentage of those of working age who are employed or unemployed) had fallen recently. In June 2008 it was 65.7% and is now 65.2%.

If the participation rate falls then there is a smaller workforce available to Australia, everything else remaining the same, and so the potential output of the economy is less.

However the key point really has to be, other things remaining the same. They didn't and so to suggest that the tiny variation in the participation rate in the last four years has restricted supply side growth is ludicrous.

What else has happened in the labour market in the last year?

Participation rate has fallen from 65.5% to 65.2%.
The labour force has grown by 95,000.
Part time employment has fallen by 6,000
Full time employment has risen by 66,000.

When looking at all of the data it must be concluded that the labour market has not restricted growth at all, indeed it has allowed a rise in productive potential. The implication of the above data, combined implies that the Long Run Aggregate Supply Curve has shifted to the right in the last year.

The lesson? Look at the whole picture and don't read trends into tiny fluctuations in the figures. The participation rate is basically stable over the period the last four years, the time period VCE Economics needs you to know about. But the labour force has grown and unemployment has fluctuated around 5% with not much variation meaning that there are not severe supply-side constraints on the Australian economy.

Limits to policy effectiveness

The RBA has engaged on a series of interest rate cuts in order to stimulate demand in the economy. If you are asked to explain a demand side policy in the last year it is a pretty good example to use.

The key with answering VCE Economics questions about policy is to use the data available and link it to the economics you have learned to explain how the policy works and if why it will be/will not be effective.

So with interest rate cuts, which you should describe,  the key thing is to link it to Consumption and Investment spending, both components of Aggregate Demand. Interest rate cuts should encourage borrowing by households and firms and reduce payments on existing loans, so raising household discretionary income and firms retained profits.

According to this logic Aggregate Demand AD should shift to the right and lead to a higher level of GDP, reducing unemployment, but raising inflationary pressure. (Draw the diagram to make this process clear.)

Of course you can explain ANY of the transmissions mechanisms channels that lead to a rise in AD. But the reason why the savings and investment channels are relevant is how current events can be used to evaluate the effectiveness of monetary policy.

The recent RBA rate cuts, which seem certain to continue of Cup day, are not being fully passed on to borrowers. This means that AD will not rise as much as hoped and so the policy is less effective than it could be.

The Age surveys how actual rates in the market have tracked the RBA rate. Remember to explain the transmission mechanism carefully so that you can explain where it can fail and gain full marks for explaining, analysing and evaluating the process.

The Age article is here

China - the most important demand side factor

There is no doubt that demand side factors have been important in Australia in the last four years.

The main driver of the Australian economy recently has been the mining boom, caused by very strong exports to China. China has experienced nearly a decade of growth rates above 10% and that demanded a great deal of mineral resources.

Now the Chinese economy is growing more slowly. It's still growing, but now by only 7.2% a year. But that's still growth isn't it?

Chinese growth demanded a great deal from the mineral suppliers of the world and supply constraints meant that the prices of commodities rose quickly. Australia saw the Terms of Trade rise substantially and that made Australia a lot better off. The Mining Resources Boom.

Today most mineral producers have expanded capacity compared to just four years ago. Australia has developed mines, opened new ones and improved port and railway facilities to allow the export of more mineral resources. World supply has expanded.

But now Chinese growth is slowing and demand for mineral resources is moderating. Mineral prices are falling as the graph of the iron ore price shows.

This means a lower value of exports for Australia, and a falling Terms of Trade. Whatever way you look at it the demand side of the economy is weakening.

This means lower Exports and Investment (as the 'Age' article linked below shows a port development has been shelved) and so lower Aggregate Demand. The multiplier effect will cause National Income to fall further and this means fewer jobs.

Last year everyone thought the Terms of Trade (then at a record high) would feature in the exam. You would be very brave not to revise this topic for 2013.

The Age reports some consequences of lower Chinese growth here

Impact of the Carbon Tax

The Age are running a poll asking people if they have felt the impact of the Carbon Tax, now 100 days old. 76%, so far, have answered no.

This is hardly surprising as it is a very small tax and applied to only 300 large firms and councils. It also has numerous offsetting elements, such as the higher tax threshold that means the lowest paid are much better off.

The result is disappointing however because the point of a tax like this is to change behaviour! The aim of the Carbon Tax is to reduce Australia's CO2 emissions.

Currently Australia lags the industrialised world in taking action on climate change. For example the UK aims to reduce CO2 emissions by 80% by 2050 and they do this by taxing petrol (a litre of petrol currently costs $2.10), a carbon tax applied to large firms and an emissions trading scheme (the ETS) which is EU wide. In addition renewable energy receives large subsidies.

The aim of any indirect tax is to raise the costs of the firm involved. This raises the market price and reduces demand for the product.

 So will the Carbon Tax be effective? 

It will if consumers see the price of 'high carbon' goods and services rising and switch to 'low carbon' goods and services which are now relatively cheaper.

It will be more effective if the high carbon goods and services have high price elasticity of demand (PED)  and so consumers switch to other goods.

It will be effective if the rise in the price of high carbon goods is high enough. 

It won't be effective if consumers do not switch, because the PED is inelastic or the price rises are too low.

It won't  be effective if the 'compensation' provided by the government is so generous that households and firms are able to continue to buy the high carbon goods.

If you are asked about policies to promote environmental sustainability the Carbon Tax is the obvious candidate from the last four years. Alternatives are seen in my example from the UK. Just don't take sides on the political arguments.

The Age report that one firm is reinstating a project it previously shelved because of fears over the Carbon Tax. 

Read it here.

2013 will see this new resource up and runing

This blog is for students of VCE Economics. It is intended to provide regular updates on relevant events, reminders of relevant examples from the last four years as required by the study design and  hints and tips.

For those who require additional help the author is available for tutoring. Contact Mark Russell through mark.russell43@hotmail.com