Exemplar for Internal Assessment Resource Economics Level 2. Resource title: Where are we headed on the business cycle?

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1 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Exemplar for Internal Assessment Resource Economics Level 2 Resource title: Where are we headed on the business cycle? This exemplar supports assessment against: Achievement Standard Analyse statistical data relating to two contemporary economic issues Student and grade boundary specific exemplar The material has been gathered from student material specific to an A or B assessment resource. Date version published by Ministry of Education December 2011 To support internal assessment from 2012 Crown 2010

2 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Grade Boundary: Low Excellence The student has analysed statistical data comprehensively relating to two contemporary economic issues, which is required for Excellence. The student has processed trade and inflation data and presented the data on three graphs accurately. The student has explained in detail the relationships between the statistical data on the contemporary economic issue of trade using the percentage change in exports and the TWI, and the explanations have been supported with direct reference to relevant data, and the foreign exchange market model. Refer to part A. The OCR and inflation have been explained, and the relationship between the OCR and the inflation rate has been explained in relation to monetary policy that aims for price stability. Although the OCR/inflation rate data has not been presented on the same graph, the relationships in the inflation statistical data have been fully explained in the analysis. Refer to part B. The inter-relationships between trade and inflation have been fully explained using TWI and OCR data, and by looking at the annual percentage change in the inflation rate and export growth. The explanations have been supported with economic concepts applied to inter-relationships identified from the data. Refer to part C. Three graphs were extrapolated to 2010, based on the long term trend lines, and reasons were provided for the future trends, and the explanations were supported with the circular flow and foreign exchange market models. Refer to part D. A more secure Excellence would include making a forecast justified with supporting evidence from the analysis that explains the extrapolated data. For example; My prediction based on the extrapolated trends and my economic analysis is that from November 2009 NZ s economy will have a slow but moderate recovery, as the NZ economy begins a phase of recovery or upswing in the business cycle, so trade will slowly improve, but so will inflationary pressure. The recovery will be weak in the beginning as firms lack business confidence, but investment will increase as confidence increases and output will grow, and demand for labour will increase. This will decrease the unemployment rate and increase the house price index. As the NZ dollar begins to depreciate our exports become relatively more affordable to overseas buyers and exports receipts increase, exporting firms will increase investment due to these increased profits. As both C and I increase, AD will increase. This will lead to economic growth, but also demand pull inflation, which means the RBNZ will look at increasing the OCR to try and maintain price stability, but they have to be careful not to jeopardise this weak recovery by contracting the economy too much by increasing interest rates too soon. Crown 2010

3 Student 1: Low Excellence Student has processed, presented and extrapolated data. Report Graph 1 shows the relationship between the TWI and the annual percentage change in exports between March 2004 and June The TWI measures the value of the New Zealand dollar compared to a weighted average of the currencies of our major trading partners. The annual percentage change in our exports show if our exports are increasing or decreasing compared to the previous year. As the TWI decreases (between December 2005 and September 2006) this suggests that the NZD is depreciating, so other currencies can now buy more of the NZD with their own currencies (see Diagram 1). This means that our exports become cheaper for other currencies to purchase, and thus more competitive, so exporters will increase output in order to meet the greater demand, resulting in an increase in the annual percentage change of exports, shown in Graph 1. This is good for the overall economy because exports receipts make up part of the national income or GDP, as shown by the equation for aggregate demand AD=C+I+G+(X-M). Graph 2 shows the relationship between the TWI and OCR between March 2004 and June The Official Cash Rate (OCR) is the interest rate set by the RBNZ to meet the inflation target specified in the Policy Target Agreement, which states inflation has to be between 1-3% on average over the medium term. The OCR influences the price of borrowing money in NZ and allows the RBNZ to influence the level of economic activity and inflation. The OCR is the overnight rate that directly influences market interest rates. As the OCR increases, this causes our market interest rates to rise, increasing the reward for savings. Foreign investors will be more likely to save their money in NZ as they will now receive more interest back. This will increase the demand for the NZD, causing the NZD to appreciate, and the TWI to increase, which is shown between March 2004 and June 2009, as the trend lines show a positive relationship and have moved in a downward direction between the time periods June 2004 to March A B Graph 3 shows the relationship between the annual percentage change in the inflation rate and export growth between March 2004 and June Inflation is defined as a general price rise, or an increase in the CPI. Export growth and inflation have an inverse relationship briefly between June 2004 and June 2005, while the inflation rate increased export growth decreased. This may be because when there is high inflation, it makes it difficult for firms to make future plans and less predictable because they are less certain about their future costs, so exporters would reduce output and reduce investment meaning C decreased production of goods and services so lower or negative growth. But after Sept 2005 the relationship becomes a positive one as the lines move in a similar upwards and downwards direction. After Sept 2005 to Sept 2008 the OCR was very high and this helps explain why export growth was falling between Sept 2006 and Sept 2007, because the higher market interest rate attracts foreign investors and this increases demand for the NZD so it appreciates as seen in Graph 2 when the TWI also increases. This makes it harder for exporters as NZ exports become less competitive and decreases the growth in exports. From Dec 2008 to June 2009 both the inflation rate and export growth rate fell due to the global recession. But the trend lines show that both the inflation rate and export growth rate have increased steadily over time and so price stability due to monetary policy is helping exporters to remain price competitive in the world market, but increasing the OCR does have an immediate negative impact on export growth, but doesn t seem to hinder it longer term. Extrapolated data 1. D

4 In graph 4 of the NZ/USD exchange rate I have extrapolated a very slight increase until approximately June 2010, and it will begin to fall after July This is because the RBNZ will keep interest rates low 1 (OCR remains at 2.5%) and the interest rate gap between NZ and the rest of the world has lessened. Diagram 1: NZ/US Foreign Exchange Market NZ/US Foreign investors will start to look elsewhere and so demand for S NZD should gradually decrease. When demand for the NZD decreases, this results in a depreciation of the dollar from D US$0.70 to US$0.68, as seen in Diagram 1. While a depreciating dollar will assist exporters and help economic growth and the recovery, it makes imported goods and services D1 more expensive and increases costs of production, therefore Q1 Q Quantity output and revenue decreases and this threatens employment as well. I extended graph 5 of the unemployment rate to increase until about July 2010Q2, before it will then start to decrease slightly, before a greater decrease from November 2010Q4. Unemployment will continue to increase slightly as firms want to keep their costs down, if they employ more workers their costs of production would increase, and they would have to increase prices which would reduce demand from consumers and this would result in reduced profits. Firms are already being affected by lower consumption spending due to the global recession, as households are trying to reduce debt or are saving more. This increased savings will increase funds available for investment for firms. Diagram 2: Circular Flow Model This should mean the unemployment Consumption Spending rate starts to reduce after July 2010 as firms use investment to increase production or improve productivity, and Households Firms as consumption spending increases Income due to households confidence in the economy improving, demand for labour Savings Investment Financial Institutions will start to increase. The circular flow model (Diagram 2) shows the recovery cycle, as both business and consumer confidence grows in the economy. I extended graph 6 of the house price index to show a gradual increase from in September 2009 to about in November There are a number of factors involved in this price increase, increased household spending; the employment rate improving and therefore incomes are beginning to increase gradually. These factors point to an increase in the demand for houses and therefore house prices will increase. 1.

5 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Grade Boundary: High Merit The student has analysed statistical data in depth relating to two contemporary economic issues, which is required for Merit. The student has processed trade and inflation data and presented the data on three graphs accurately. The student has explained in detail the relationships between the statistical data on the contemporary economic issue of trade using the percentage change in exports and the TWI, and the explanations have been supported with economic concepts applied to relationships identified from the data. Refer to part E. The OCR and inflation have been explained, and the relationship between the OCR and the inflation rate has been explained in relation to monetary policy that aims for price stability. Although the OCR/inflation rate data has not been presented on the same graph, the relationships in the inflation statistical data have been fully explained in the analysis. Refer to part F. The inter-relationships between trade and inflation have been explained in detail using the TWI and OCR data, and looking at the annual percentage change in the inflation rate and export growth. The explanations have been supported with direct reference to relevant data, and the foreign exchange market model. Refer to part G. Three graphs were extrapolated to 2010, based on the long term trend lines. However, the student needs to make a justified forecast using supporting evidence from the analysis that explains the extrapolated data for Excellence. For example: My prediction of weakened trade and a slow economic recovery until after December 2010 is based on extrapolated trends. Graph 4: The NZD has continued to strengthen in recent quarters against the USD in comparison to the previous quarters. If the exchange rate were to continue its recent appreciation, it looks like a gradual increase. I predict it will continue to appreciate to higher levels over much of In Graph 1 the TWI steadily increased between March 2006-June 2007 and the 2009 Monetary Policy Statement says the NZD will continue to gradually appreciate, strengthening against the USD, so by December 2010 the NZD will be around US$0.80. Graph 5: The percentage of unemployment is still gradually increasing, and is not going to decrease until after December Domestically, retail spending appears to have stopped falling, following a rise in net immigration and a pick-up in the housing market over recent months. Business profits are still under pressure because of the low level of activity and the elevated NZD; this limits the possibility for employment and investment to return quickly. Businesses are reluctant to offer jobs, which puts a strain on the unemployment level. Graph 6: In recent quarters, the House Price Index (HPI) is increasing. Since March 2010, housing turnover is beginning to stabilise, but is higher than previous quarters. House prices are increasing and are recovering from the recession period. Therefore the HPI is increasing slowly as a result of growth in the economy and the Sept 2009 Monetary Policy Statement summary provides evidence of this. Therefore by December 2010 the HPI may have reached around Crown 2010

6 Student has processed, presented and extrapolated data. Student 2: High Merit Report Graph 1: The trade-weighted index (TWI) measures the value of the NZ dollar in terms of a weighted average of the currencies of our major trading partners. The weightings are based on the relative share of each country in our overseas trade transactions. They are also weighted against the size of each country s GDP. Our Annual Percentage change in exports is the increase or change in the value of goods and services we export, to the overseas market based on a yearly period. The TWI trend line (March 2004 to March 2009) shows that the TWI is decreasing; therefore it reflects that we are experiencing a decline in our exchange and may be in a recession period. In relation to the TWI our annual percentage change in exports is gradually increasing over the same time period, this reflects growth in our economy as our E exports value is increasing therefore we can assume that growth is happening in the economy as the annual export values increase, because exports make up part of aggregate demand, AD = C+I+G+(X-M). NZ/USD Foreign Exchange Market Model USD Graph 2: The Official Cash Rate (OCR) is the interest rate set S by the RBNZ to meet the inflation target specified in the Policy Target Agreement, which states inflation has to be between % on average over the medium term. The OCR influences the.68 D price of borrowing money in NZ and allows the RBNZ to influence the level of economic activity and inflation. The OCR D1 directly influences the market interest rates. As market interest Q1 Q Quantity rates increase people spend less on goods and services. This is because their savings get a higher rate of interest so there is more incentive to save rather than spend; and conversely, people with mortgages and loans may F experience higher interest payments. This reduces pressure on prices rising and inflation pressure is reduced. The trend line shows the OCR decreasing over this time period, lower interest rates causes the NZD to depreciate, as foreign investors demand less NZD. When demand for the NZD decreases, this results in a depreciation of the dollar from USD 0.70 to USD 0.68, as seen in the FOREX market model. The TWI will decrease as well, which is shown between March 2004 and June Graph 3 shows the relationship between the annual percentage change in the inflation rate and export growth between March 2004 and June Inflation is defined as a general price rise, or an increase in the CPI. Export growth and inflation have an inverse relationship briefly between June 2004 and June G 2005, when inflation increased the other decreased. But after Sept 2005 the relationship becomes a positive one as the lines move in a similar upwards and downwards direction. After Sept 2005 to Sept 2008 the OCR was very high and this helps explain why export growth was falling between Sept 2006 and Sept 2007, because the higher market interest rate attracts foreign investors and this increases demand for the NZD so it appreciates as seen in Graph 2 when the TWI also increases. This makes it harder for exporters as NZ exports become less competitive and decreases the growth in exports. From Dec 2008 to June 2009 both the inflation rate and export growth rate fell due to the global recession. But the trend lines show that both inflation and export growth have increased steadily over time and so overall monetary policy is helping exporting firms to remain price competitive in the world market, but increasing the OCR does have a negative impact on export growth in the short term. 1.

7 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Grade Boundary: Low Merit The student has analysed statistical data in depth relating to two contemporary economic issues, which is required for Merit. The student has processed trade and inflation data and presented the data on three graphs accurately. The student has explained the relationships between the statistical data on the contemporary economic issue of trade using the percentage change in exports and the TWI, and more explanation regarding export growth is provided from Graph 3. Refer to part H. The OCR and inflation have been explained, and the relationship between the OCR and the inflation rate has been explained in relation to the actions taken by the RBNZ. Although the OCR/inflation rate data has not been presented on the same graph, the relationships in the inflation statistical data have been fully explained in the analysis. Refer to part I. The inter-relationships between trade and inflation have been explained in detail using TWI and OCR data, and the annual percentage change in the inflation rate and export growth. The explanations have been supported with direct reference to relevant data, and economic concepts. Refer to part J. A more secure Merit would be attained if the foreign exchange market model was also used to support the explanations of the relationship between the OCR and the TWI, providing more economic support for the inter-relationships between the two contemporary economic issues of trade and inflation. Crown 2010

8 Student has processed and presented the data accurately. Student 3: Low Merit Report Graph 1: The trade-weighted index (TWI) measures the value of the NZ dollar in terms of a weighted average of the currencies of our major trading partners. The weightings are based on the relative share of each country in our overseas trade transactions. They are also weighted against the size of each country s GDP. Our Annual Percentage change in exports is the increase or change in the value of goods and services we export, to the overseas market based on a yearly period. The TWI trend line shows that the TWI is increasing between March 2004 and June 2007; therefore it reflects that our currency is strengthening against our trading partner s currencies, as the trend line of the TWI is at a steady increase. In relation to the TWI our annual percentage change in exports is generally decreasing over the same time period, because demand for NZ exports decreases as they become relatively more expensive to purchase. H Graph 2: The Official Cash Rate (OCR) is the interest rate set by the RBNZ to meet the inflation target specified in the Policy Target Agreement, which states inflation has to be between 1-3% on average over the medium term. The OCR influences the price of borrowing money in NZ and allows the RBNZ to influence the level of economic activity and inflation. The OCR directly influences the market interest rates. As market interest rates increase people spend less on goods and services. This is because their savings get a higher rate of interest so there is more incentive to save rather than spend; but people with mortgages and loans may experience higher interest payments. The OCR steadily rises between March 2004 and I June 2007, higher interest rates causes the NZD to appreciate, as foreign investors demand NZD so the TWI will increase as well, which is shown between March 2004 and June Graph 3 shows the relationship between the annual percentage change in the inflation rate and export growth between March 2004 and June Inflation is defined as a general price rise, or an increase in the CPI. Export growth and inflation have an inverse relationship briefly between June 2004 and June 2005, when inflation increased the other decreased. But after Sept 2005 the relationship becomes a positive one as the lines move in a similar direction. After Sept 2005 the OCR was very high and this helps explain why export growth was falling between Sept 2006 and June 2007, because the higher market interest rate attracts foreign investors and this increases demand for the NZD so it appreciates as seen in Graph 2 when the TWI also increases. J

9 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Grade Boundary: High Achieved The student has analysed statistical data relating to two contemporary economic issues, which is required for Achieved. The student has processed trade and inflation data and presented the data on three graphs accurately. The student has explained what the TWI is in detail, and explained the relationship between the TWI and export growth, supported with one direct reference to the data. Refer to part K. The OCR and inflation have been explained, and the relationship between the OCR and the inflation rate has been explained in relation to the actions taken by the RBNZ. Although the OCR/inflation rate data has not been presented on the same graph, the relationships in the inflation statistical data have been explained in the analysis. Refer to part L. The student has used the foreign exchange market model to support the explanation of the inter-relationships between the OCR and TWI, and partially explained the annual percentage change in the inflation rate and export growth, however there is a lack of direct reference to data related to trade and inflation in the explanations. Refer to part M. More explanation of data is needed to meet the requirements of Merit, which requires students to analyse the statistical data in depth. Crown 2010

10 Student has processed and presented the data accurately. Student 4: High Achieved Report In graph 1 we can see the relationship between TWI and annual percentage change in New Zealand s exports from March 2004 to June The TWI is a measure of the value of the NZD in terms of a weighted average of the currencies of our major trading partners. Our major trading currencies are the USD, the Yen, the UK pound, and the Euro. The TWI is a summary statistic of the strength of the NZD. The trend in this graph shows when the TWI increases, exports decrease and vice versa. This is because as the NZD depreciates (TWI decreases) our exports become cheaper and demand for our exports increases. We see this happening in March 2006 where the TWI decreased and the annual percentage change in exports increased. As the NZD depreciates our exports become cheaper because our major trading K partner s currencies can buy more of the NZD. Our exporters will need to increase output and productivity as TWI decreases. The household sector will gain more jobs and the unemployment rate will decrease, and also their income will increase and consumption will increase leading to an increase in growth in the economy. Foreign Exchange Market Model In graph 2 we see the relationship between TWI and the OCR. NZ/USD The OCR is the official cash rate. It is the interest rate set by NZS the Reserve Bank on their settlement cash deposits and is also the main tool the RBNZ uses to carry out monetary.80 policy. The Reserve Bank will pay 0.25% lower than the OCR.76 NZD1 for registered banks for their settlement cash deposits and the RBNZ will lend to registered banks at 0.25% above the OCR if NZD they need to borrow from them to fund their settlement cash deposits. In the graph both TWI and OCR are slightly L Q Q1 Quantity increasing. If the RBNZ decided to tighten the monetary policy by increasing the OCR our interest rates will increase, this causes a greater reward for savings and investment from foreigners overseas, as seen in the model where demand for NZD has increased, this is related to TWI because as interest rates increase foreigners want to invest their money in NZ and so our dollar appreciates, in this case, against the USD causing the TWI to increase. However, if the TWI decreases, then our dollar has depreciated making exports more price competitive and this increases our exports receipts. In graph 3 we see the trend line for the inflation rate is generally increasing and the export growth rate is generally increasing, showing a positive relationship. Inflation is a general price increase of goods and M services and households spend a greater proportion of their income on them. When inflation increases it is harder for firms to plan for future investments and they are unsure whether to invest or not because they are uncertain about future costs of production. This will lead to firms producing less and output will decrease. When output decreases exporting firms are likely to also decrease demand for workers.

11 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Grade Boundary: Low Achieved The student has analysed statistical data relating to two contemporary economic issues, which is required for Achieved. The student has processed trade and inflation data and presented the data on three graphs accurately. The student has explained the relationship between the TWI and export growth, but there is no direct reference to data to support the explanation. Refer to part N. Although the OCR/inflation rate data has not been presented on the same graph, the relationships in the inflation statistical data have been briefly explained in the analysis when defining the OCR and Inflation. The inter-relationships between the TWI, OCR and Inflation have been supported with economic concepts, but there is no direct reference to the trade or inflation data in the explanations or use of the foreign exchange market model to support explanations. Refer to part O. The trends for the annual percentage change in the inflation rate and export growth were described, and inflation was defined but the inter-relationships were not explained. Refer to part P. A more secure Achieved would include specific reference to data to support the explanations of the relationships between the statistical data on the contemporary economic issues of trade and inflation, and expansion of economic concepts and/or the foreign exchange market model used to support the explanations of the interrelationships between the two contemporary economic issues of inflation and trade. Crown 2010

12 Student has processed the data, and presented the data accurately. Student 5: Low Achieved Report In graph 1 the TWI generally increases when the annual percentage change in exports decreases. When the TWI increases and shows an upwards trend it means that the NZD is appreciating. Since that means NZ has a stronger currency against our major trading partners NZ becomes less price competitive because the price of our goods will be higher (so demand for our exports fall and this leads to export receipts falling). This is because the country that is trading with us will now require more of their currency in order to buy our goods. N In graph 2 the TWI has increased and so has the OCR. When the OCR increases the market interest rates increases (which means the cost of borrowing increases) and that means households will borrow less for spending (so consumption decreases). This will lead to firms borrowing less for investment and investment decreases as a result. Firms will produce less output as they are less confident in their business prospects. When there is a higher annual inflation rate, there is an increase in the general price level over time. O This leads to less output because it is less affordable for firms to invest and households are paying more for the goods they consume. Fewer workers are needed by exporting firms as well, because the increased TWI means less NZ exports will be demanded by foreigners, so households earn less income and consumption spending decreases. Graph 3 shows the relationship between the annual percentage change in the inflation rate and export growth between March 2004 and June Inflation is defined as a general price rise, or an increase in the CPI. As the inflation rate increased the export growth decreased until March 2006 when it started to follow the same direction as the inflation rate. P

13 Exemplar for internal assessment resource Economics 2.5B for Achievement Standard Grade Boundary: High Not Achieved The student has not adequately analysed statistical data relating to two contemporary economic issues, which is required for Achieved. The student has processed trade and inflation data (couple of calculation errors), and presented data on three graphs (some errors in graphing conventions). The student has partially explained the relationship between the percentage change in export growth and the TWI, but there is no direct reference to data used to support the explanation. Refer to part Q. Although the OCR/inflation rate data has not been presented on the same graph, the relationships in the inflation statistical data have been briefly explained in the analysis when defining the OCR and Inflation. The OCR and TWI have been defined and how the OCR is used to ease inflationary pressure is explained, however, the inter-relationships between the TWI and OCR data have not been explained. Refer to part R. The trends for the annual percentage change in the inflation rate and export growth were described, and inflation was defined but the inter-relationships were not explained. Refer to part S. The analysis is limited due to incorrectly processed and presented data, showing incorrect trends, and there is a lack of direct reference to and explanation of relationships in the inflation and trade data, and economic concepts and/or a foreign exchange market model used in the explanations of the inter-relationships between the two contemporary economic issues of inflation and trade, so overall the student has not met the requirements of Achieved. Crown 2010

14 Student 6: High Not Achieved Student has processed data (couple of calculation errors), and presented data (some errors in graphing conventions). Report Graph 1 shows TWI increasing and the annual percentage change in exports increasing after March Before March 2007 the annual percentage change was both increasing and decreasing. This is because as the TWI increases, our exports become more expensive and demand for our exports decreases, so the export growth goes down. Q Graph 2 shows us that both the TWI and the OCR are steadily increasing up to June The TWI stands for the trade weighted index which measures the value of the NZ dollar in terms of a weighted average of the currencies of our major trading partners such as the Australian dollar, the US dollar, and a few others. They are also weighted against the size of each country s GDP. The official cash rate (OCR) is the main monetary policy tool used by the Reserve Bank. It is the interest rate set by the Reserve Bank. If the OCR increases this will increase the short term interest rates, causing the levels of consumer spending and R firm s investment to decrease, while increasing savings. The level of aggregate demand will fall reducing inflationary pressures. Graph 3 shows the relationship between the annual percentage change in the inflation rate and export growth between March 2004 and June Inflation is defined as a general price rise, or an increase in the CPI. As the inflation rate increased the export growth decreased until March 2006 when it started to follow the inflation rate. S

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