2022 HSC Economics: Worked Solutions

Worked solutions to the 2022 HSC Economics examination.

Get the paper first. These solutions describe each question rather than reproducing it, so open the official paper alongside. NESA publishes it free in the 2022 Economics exam pack. The answers below are checked against the official marking guidelines. The explanations are our own.

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Section I: multiple choice

Answer key

Q	A	Q	A	Q	A	Q	A
1	C	6	C	11	A	16	C
2	A	7	B and D	12	D	17	B
3	D	8	A	13	B	18	A
4	D	9	B	14	D	19	A
5	B	10	B	15	D	20	C

Question 7 has two accepted answers. NESA credited both B and D. See the note below, because it is worth understanding why.

The reasoning

1. Promotion of global financial stability. C. The IMF. Its mandate is monetary cooperation, exchange rate stability and short-term crisis lending. The World Bank does long-term development finance, the UN is a general political body, and the OECD is a research and policy-benchmarking organisation.

2. A jobless person who stops looking for work. A. Not unemployed and not in the labour force. The official definition requires a person to be actively seeking and available for work, so abandoning the search moves them out of the labour force entirely. This is the discouraged worker effect, and it explains why a falling unemployment rate can be misleading: you have to check the participation rate at the same time.

3. Does NOT contribute to globalisation. D. A decrease in the significance of transnational corporations. TNCs are one of the main vehicles of globalisation, organising production and investment across borders. Migration, financial flows and reduced protection all deepen integration.

4. Full employment occurs when unemployment is. D. Low and consistent with a non-accelerating rate of inflation, which is the NAIRU. Full employment does not mean zero unemployment, because frictional, structural and seasonal unemployment persist even at full employment. What is eliminated is cyclical unemployment. Option B has this exactly backwards.

5. Result of a depreciation. B. Imports become more expensive in domestic currency and inflation increases, which is imported cost-push inflation. Exports become cheaper to foreigners, not more expensive, and that is what makes options C and D wrong on their own terms.

6. Tradable water permits. C. Market-based policies. Creating a property right in water and allowing it to be traded uses the price mechanism to allocate a scarce environmental resource to its highest-value use. Targets set a goal without an instrument, and regulations mandate behaviour directly.

7. An Australian company buys $1 million of shares in a European bank. B and D. The intended answer is portfolio investment, because a $1 million shareholding in a European bank is almost certainly below the 10% threshold that defines direct investment, and it carries no management control.

NESA also accepted D, other investment, because the question does not state the size of the shareholding as a percentage of the bank, and "other investment" is the residual category in the financial account. Where a question leaves a defining fact unstated, NESA will sometimes credit a defensible alternative. Do not count on it, but do note the lesson: the 10% control threshold is what separates direct from portfolio investment, and if the question does not tell you the percentage, it is testing whether you know the threshold exists.

8. NOT likely to have caused this AD shift. A. The diagram showed aggregate demand shifting left. An increase in exports raises AD, because X is an injection, so it cannot have caused a leftward shift. Rising imports, falling investment and falling government spending all reduce AD.

9. Why end a short-term wage subsidy. B. To reduce the Budget deficit. A wage subsidy is government expenditure, so withdrawing it reduces outlays and improves the Budget outcome. Ending it contracts the economy rather than expanding it, and the point of a wage subsidy is to encourage hiring, so D inverts the purpose.

10. Government denies an airline merger. B. Regulation, meaning an active government intervention, used to enhance competition in a product market, since airlines sell a service to consumers. A factor market is where the factors of production are traded: labour, capital and land. Two decisions in one question, and both must be right.

11. Balance on the current account. A.

CA = net goods + net services + primary income + secondary income
   = 80.5 + 10.2 + (−63.8) + (−4.3)
   = $22.6 billion

The capital account, financial account and net errors and omissions are not part of the current account. They are there purely as distractors. Option C ($30.7bn) is what you get by wrongly folding in net errors and omissions.

12. GST raised from 10% to 15%. D. The GST is a regressive tax, because low-income households spend a larger proportion of their income on consumption and therefore pay a larger proportion of their income in GST. Raising the rate increases inequality, and a higher Gini coefficient means greater inequality. Options B and C pair the two halves incorrectly, which is the standard trap.

13. Most likely to increase the participation rate. B. An increase in the childcare subsidy lowers the effective cost of working for parents, particularly women, drawing them into the labour force. A lower tax-free threshold and a higher top marginal rate both reduce the return to working, and raising the school leaving age removes teenagers from the labour force.

14. Combination most likely to lower GDP. D. AD left and AS left. Both shifts reduce equilibrium output, so the fall in GDP is unambiguous. Options B and C move price and output in opposing directions, so the effect on GDP depends on the relative magnitude of the shifts, making them indeterminate.

15. Cause the NAIRU to fall. D. Increased government spending on vocational training. The NAIRU is determined by structural factors, primarily the skills match between workers and jobs, so training reduces the mismatch, lowering structural unemployment and therefore the NAIRU. Interest rates and welfare spending are demand-side or incentive effects that shift unemployment along the Phillips curve rather than shifting the curve itself.

16. Negative real economic growth. C. Deflate each nominal figure by its price index and compare with the $20 billion base:

Real GDP = nominal GDP ÷ CPI × 100

A: 18 ÷ 90  × 100 = 20.00   →  no change
B: 22 ÷ 110 × 100 = 20.00   →  no change
C: 23 ÷ 118 × 100 = 19.49   →  NEGATIVE  ✓
D: 27 ÷ 130 × 100 = 20.77   →  positive

Country A is the trap. Nominal GDP fell from $20bn to $18bn, which looks like contraction, but prices fell 10% as well, so real output was unchanged.

17. Multiplier with a fall in investment. B.

MPC = ΔC ÷ ΔY = (1920 − 1600) ÷ (2400 − 2000) = 320 ÷ 400 = 0.8
k = 1 ÷ (1 − MPC) = 1 ÷ 0.2 = 5
ΔY = −30 × 5 = −$150 million
New income = 2400 − 150 = $2250 million

Option C subtracts the $30 million without multiplying it.

18. Terms of trade from Year 2 to Year 3. A.

ToT = (export price index ÷ import price index) × 100

Year 2: 115 ÷ 105 × 100 = 109.5
Year 3: 110 ÷ 85  × 100 = 129.4     →  IMPROVES

Now the reason. Export prices actually fell slightly, from 115 to 110, so the improvement is driven entirely by the collapse in import prices from 105 to 85. That rules out "increase in global demand for exports". The answer is a reduction in foreign labour costs, which lowers the cost of producing the goods we import.

This is the best-designed question in the paper, because it requires the calculation and a diagnosis of which side of the ratio moved.

19 and 20. The tariff reduction. These are the two hardest questions in the paper, and they are linked. The world price is $8, the initial tariff is $6 giving a domestic price of $14, and the tariff is cut to $4 giving a domestic price of $12.

The key insight most candidates missed: at a domestic price of $14, domestic supply meets domestic demand entirely, so imports are zero. The $6 tariff was prohibitive. Read the graph at $14 and check, because the supply and demand curves meet there.

19. Impact on government revenue. A.

Tariff revenue = tariff per unit × units imported

At $6 tariff (price $14): imports = 0     →  revenue = $0
At $4 tariff (price $12): imports = 20m   →  revenue = 4 × 20m = $80m

Change = +$80 million

Counter-intuitive but correct: cutting the tariff increased government revenue, because it went from collecting a high rate on nothing to collecting a lower rate on something.

20. Change in foreign producers' revenue. C.

Foreign producers receive the WORLD price, not the domestic price.

Before: 8 × 0    = $0
After:  8 × 20m  = $160 million

Change = +$160 million

The trap is using the domestic price of $12 and getting $240 million, which is option D. Foreign producers never see the tariff, because it is collected by the importing government. Foreign revenue is always world price multiplied by import volume.

Where marks were lost. Questions 19 and 20 were the hardest in the paper, and both fell to candidates who did not check whether imports were zero at the original price. Question 16 caught candidates who compared nominal figures. Question 12 caught candidates who thought a higher Gini meant more equality.

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Section II: short answer

Question 21 (10 marks): fiscal policy

(a) Define fiscal policy (2 marks).

Fiscal policy is the use of the Commonwealth Budget, meaning government revenue (primarily taxation) and government expenditure, to influence the level of economic activity, resource allocation and the distribution of income in the economy.

Both instruments named, plus the purpose. A definition mentioning only spending caps at one mark.

(b) Explain a consequence of ONE method of financing a Budget deficit (3 marks).

Name the method, because the answer space asks for it explicitly.

Method: selling government bonds to the domestic private sector.

When the government issues bonds domestically it competes with private borrowers for the pool of available savings. The increased demand for loanable funds raises interest rates, which raises the cost of borrowing for firms and households. Private investment and consumption that would otherwise have occurred are therefore displaced, which is the crowding out effect. This reduces the net expansionary impact of the deficit, because public spending has partly substituted for private spending instead of adding to it.

Crowding out is the expected answer. The alternatives are selling bonds overseas, which raises foreign debt and future net primary income outflows, and borrowing from the RBA, which is monetary financing, is inflationary, and is not used in Australia.

(c) Explain the economic factors contributing to the government's current fiscal policy stance (5 marks).

This question is deliberately contemporary, and it expects the data from the year you sit the exam. In 2022, the relevant factors were:

The 2021 to 2022 Budget forecast a deficit of approximately $107 billion, down from the record $134 billion deficit of 2020 to 2021. Although a deficit of that size is expansionary in its impact, the stance of fiscal policy was technically contractionary, because stance is measured by the change in the Budget outcome rather than its level.

Several factors drove this. First, the economic recovery following the end of lockdowns raised employment and incomes, so the automatic stabilisers operated in reverse: income tax and company tax receipts rose while unemployment benefit outlays fell, narrowing the deficit without any discretionary decision. Second, the large temporary pandemic support measures, including JobKeeper, the cash flow boost and the coronavirus supplement, were wound back as the emergency passed, removing a large block of expenditure. Third, record commodity prices, especially for iron ore and coal, delivered an unanticipated surge in company tax and royalty revenue.

Working the other way, the government faced pressure to support the recovery, and rising inflation created a competing objective, since expansionary fiscal policy would have added to inflationary pressure at a time when the RBA was beginning to tighten. The rising level of public debt and the future cost of servicing it also weighed on the stance.

When you sit this question, use the figures from your own Budget year. The examiners explicitly allow for changed circumstances, and an answer using data three years out of date reads as memorised.

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Question 22 (10 marks): market failure and the environment

(a) Using examples, distinguish between a public good and a private good (2 marks).

The examples are compulsory, because the question says "using examples".

A public good is non-rival, meaning one person's consumption does not reduce the amount available to others, and non-excludable, meaning non-payers cannot be prevented from consuming it. A street light is an example: it lights the street for everyone at once and nobody can be excluded from the light. Because non-payers cannot be excluded, private firms cannot charge for it, and the free rider problem means the market does not supply it.

A private good is rival and excludable, such as a pen. Only one person can use it at a time, and the seller can withhold it from anyone who does not pay, so a price can be charged and the market supplies it efficiently.

The two properties, both goods, both examples. Two marks, no room for padding.

(b) How household solar panels create a positive externality (3 marks).

A positive externality arises when the social benefit of an activity exceeds the private benefit captured by the decision-maker. A household installing solar panels considers only its own benefit, meaning the reduction in its electricity bill. But its generation displaces electricity that would otherwise be produced by coal-fired plants, so third parties benefit from lower greenhouse gas emissions and reduced local air pollution without paying anything.

Because households ignore this third-party benefit when deciding, the market under-provides solar installation relative to the socially optimal level. That is the market failure justifying government intervention through rebates and feed-in tariffs, which raise the private benefit until it approaches the social benefit.

Three marks needs the third-party benefit and the under-provision conclusion.

(c) How environmental sustainability may conflict with other economic objectives (5 marks).

Name the objectives you are setting it against, because vagueness costs marks here.

Conflict with economic growth. Environmental regulation, carbon pricing and restrictions on resource extraction raise production costs and constrain the use of natural resources, reducing aggregate supply. Growth measured by real GDP may fall in the short to medium term. There is also an opportunity cost, because capital directed to emissions abatement is capital not directed to expanding productive capacity.

Conflict with full employment. Reducing reliance on fossil fuels contracts coal and gas industries, generating structural unemployment concentrated in specific regions such as the Hunter, the Bowen Basin and Gladstone. The workers displaced hold industry-specific skills and are geographically immobile, so re-employment is slow.

Conflict with price stability. Carbon pricing and higher energy costs during the transition raise business input costs, generating cost-push inflation that reduces real incomes and constrains monetary policy.

Conflict with external stability. Coal and LNG are among Australia's largest export earners. Reducing fossil fuel exports worsens the balance on goods and services and the current account, and puts downward pressure on the AUD.

Conflict with income distribution. Higher energy prices are regressive, because low-income households spend a larger proportion of income on energy. Environmental policy therefore worsens measured inequality unless it is paired with compensation.

Underlying all of these is a conflict between the present and the future. Environmental sustainability trades measurable short-term costs for intergenerational equity, a benefit that is diffuse, delayed, and accruing to people who cannot vote today.

That closing sentence is the difference between four marks and five.

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Question 23 (10 marks): exchange rates and structural change

(a) How a currency's value is determined under a float (2 marks).

Under a floating exchange rate the value of the currency is determined by the interaction of demand and supply in the foreign exchange market, with no direct government intervention. Demand for the AUD comes from exports, capital inflow and speculation. Supply comes from imports, capital outflow and Australians investing abroad. The rate settles where the two are equal, and moves continuously as they change.

(b) Impact of an increase in the cash rate on the exchange rate (3 marks).

An increase in the cash rate raises interest rates across the economy, widening the interest rate differential between Australia and other economies. Foreign investors seeking higher returns increase their holdings of Australian financial assets, and to do so they must purchase Australian dollars on the foreign exchange market. Demand for the AUD shifts right, causing the currency to appreciate. Australian investors also become less inclined to invest overseas, reducing the supply of AUD and reinforcing the appreciation.

Both blades of the scissors, meaning demand rising and supply falling, earn the third mark.

(c) Likely changes to the structure of Australian industry from current global trends (5 marks).

Services exports were severely disrupted by the pandemic. Education and tourism, Australia's largest service exports, collapsed with border closures and will take years to rebuild foreign markets even after restrictions lift. The sector's share of exports is likely to remain below its pre-pandemic level in the short term.

Mining faces long-run structural decline in fossil fuels. As trading partners pursue net zero commitments and shift to renewable generation, global demand for Australian thermal coal and gas will fall. Since these are among the largest export earners, this represents a major structural adjustment with concentrated regional employment effects.

Renewables and critical minerals will expand. The same transition raises demand for lithium, cobalt, rare earths, copper and potentially green hydrogen, inputs in which Australia holds substantial reserves. Structural change is therefore a reallocation within the resources sector rather than simply its contraction.

Manufacturing may partially reshore. Pandemic supply chain disruption exposed the risk of concentrated offshore production, prompting policy interest in sovereign capability in areas such as pharmaceuticals, defence and advanced manufacturing, reversing decades of decline.

Technology and digital services will grow, accelerated by the shift to remote work and online delivery, while trade tensions and geopolitical fragmentation are likely to push firms towards diversifying markets away from concentration in a single trading partner.

The verb is explain, so give the mechanism for each change, not a list of sectors.

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Question 24 (10 marks): trade in a non-Australian economy

(a) Name an economy, then explain one positive and one negative impact of trade (3 + 3 marks).

Two separate three-mark parts. Give each its own developed mechanism. Using Brazil:

(i) Positive.

From the late 1980s Brazil liberalised its agricultural markets and opened them to trade. Access to world markets in soybeans, beef, sugar, coffee and citrus allowed Brazilian producers to specialise according to comparative advantage and to achieve economies of scale serving a global rather than a domestic market. Competition drove productivity growth and investment in agricultural technology. Brazil transformed from a net food importer into one of the world's largest food exporters, raising farm incomes, rural employment and living standards, and generating the export revenue that funded broader development.

(ii) Negative.

The expansion of export agriculture drove extensive land clearing in the Amazon, with roughly a fifth of the rainforest lost to date. This produces a negative externality borne globally rather than by Brazilian producers, because carbon released through deforestation contributes to climate change and biodiversity loss is irreversible. Since the environmental cost is not reflected in the world price of beef or soybeans, the market signal encourages further clearing. Trade has also increased Brazil's exposure to commodity price volatility, transmitting external shocks directly into national income.

If you use China instead, the positive is export-led manufacturing growth and poverty reduction, and the negative is regional inequality or environmental degradation. Either economy works, but you must name it.

(b) Discuss the likely impact of increasing an import quota on beef (4 marks).

Discuss means both sides. Note that increasing a quota is a move towards freer trade, the opposite direction to the 2023 question.

Raising the quota permits a larger volume of imported beef, increasing domestic supply and lowering the domestic price.

Consumers gain. They access more beef at a lower price, raising real purchasing power and consumer surplus. Firms using beef as an input, such as restaurants and food processors, face lower costs, which can moderate cost-push inflationary pressure through the supply chain.

Domestic producers lose. Local beef farmers face greater competition from imports at lower prices, reducing revenue, profitability and output. Employment in the domestic industry falls, and the adjustment costs are concentrated in rural regions with limited alternative employment. The loss of quota rents previously captured by importers or licence holders is a further redistribution.

Efficiency improves. Resources are released from an industry in which the country lacks comparative advantage and reallocated towards more productive uses, raising long-run growth. The move also improves trade relations and may encourage reciprocal liberalisation by trading partners, expanding market access for the country's own exporters.

On balance the aggregate welfare gain is positive, because consumer gains exceed producer losses, but the benefits are diffuse while the costs are concentrated, which is why quota liberalisation is politically difficult.

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Section III: stimulus-based extended response

Question 25: components of the balance of payments and the value of the AUD

The stimulus gave ABS data for the March quarter 2021: a record current account surplus, driven by a $5.2 billion increase in the balance on goods and services, with exports up $7.8 billion (7%) against imports up $2.6 billion (3%), and a net primary income deficit widening by $3.1 billion to $6.0 billion. A second graph showed the AUD/USD rate from 2012 to 2022, falling from above parity in 2012 to around 0.70.

Thesis. The value of the Australian dollar reflects the demand for and supply of AUD generated by the transactions recorded in the balance of payments, so changes in the trade balance, in income flows and in capital flows each transmit directly into the exchange rate. The financial account dominates in the short run and the current account in the long run.

The paragraph plan:

1. Establish the framework. Every credit in the balance of payments creates demand for AUD and every debit creates supply. The exchange rate is the price that clears the two, which is why the accounts must sum to zero under a float.
2. The balance on goods and services. Use the stimulus: exports up 7%, imports up only 3%, producing a record surplus. Rising export receipts increase demand for AUD, and subdued imports mean less supply. Both push the currency up.
3. The terms of trade. Record iron ore prices, driven by Chinese demand and supply disruption in Brazil, meant foreigners had to buy more AUD to purchase the same physical volume of exports. This is the strongest single driver of the AUD, and the reason it is often described as a commodity currency.
4. Net primary income. The stimulus shows the deficit widening by $3.1 billion to $6.0 billion. Servicing foreign liabilities requires converting AUD into foreign currency, increasing the supply of AUD and pushing the currency down. Note the offset: a large current account surplus in the trade component was partly counteracted by the income component.
5. The financial account. Capital flows dwarf trade flows in daily foreign exchange turnover. Interest rate differentials drive them, and the RBA's cash rate at 0.10% in 2020 and 2021 narrowed Australia's differential against other economies, reducing capital inflow and demand for AUD.
6. Explain the puzzle in the graph. This is where the top band is won. Despite record trade surpluses, the graph shows the AUD well below its 2012 level of above parity. The explanation is that the 2012 peak coincided with both a terms of trade boom and a large positive interest rate differential, whereas by 2021 the trade side was strong but the rate differential had disappeared. The financial account, not the current account, drove the difference.
7. Speculation amplifies both, because expectations of future movements generate transactions today.
8. Judgement. Trade flows explain the medium-term trend and financial flows the short-term level, and the two can pull in opposite directions, as the stimulus period demonstrates.

What separated the top band: using the graph to identify the apparent contradiction and then resolving it, instead of describing the trade surplus and asserting the dollar must have risen.

Question 26: labour market policies, growth and distribution

The stimulus paired an ABS productivity table, with GDP per hour worked ranging from −0.1% to 1.5% across 2016 to 2021 and real unit labour costs falling in four of the five years, with a wages and GDP growth graph, and an RBA speech by then-Governor Philip Lowe attributing weak aggregate wage growth to inertia in Australia's wage-setting processes: enterprise agreements renegotiated only every two to three years, the annual Fair Work Commission award review, and public sector wage caps.

Thesis. Australia's decentralised labour market has delivered productivity-linked wage outcomes and flexibility that supported a long growth expansion, but the institutional inertia identified by the RBA has produced persistent weak wage growth, and the resulting fall in labour's share of income has worsened the distribution of income and wealth.

The plan:

1. Define the labour market, and outline the shift from centralised wage determination to enterprise bargaining from 1991 and individual contracts thereafter.
2. The growth channel through productivity. Enterprise bargaining links wages to productivity at the firm level. Use the table: real unit labour costs fell in four of the five years, meaning wage growth ran below productivity growth. Falling unit labour costs improve international competitiveness and firm profitability, supporting investment and growth.
3. The growth channel through flexibility. A decentralised system allows wages and conditions to adjust to firm-level conditions, which cushioned employment through the 2008 crisis and the 2020 recession. Australia's run of consecutive growth before 2020 is the evidence.
4. The inertia problem. Quote Lowe directly. Enterprise agreements renegotiated every two to three years, annual award reviews and public sector caps all slow the transmission of tight labour markets into wages, which cuts both ways: it dampens wage inflation but also delays real wage recovery.
5. Distribution through the wage share. Wages growing more slowly than productivity means labour's share of national income falls and capital's share rises. Since wealth ownership is far more concentrated than wage income, this widens the distribution of both income and wealth.
6. Distribution through dispersion. Decentralisation widens the gap between workers with strong bargaining power, meaning the skilled, unionised and those in profitable industries, and those without, meaning the low-skilled, casual and gig economy workers. The award system and minimum wage act as the counterweight, protecting the low paid.
7. Distribution feeds back into growth. Weak wage growth suppressed household consumption and consumer confidence before the pandemic, weakening the growth the policies were meant to support. The two objectives are not independent.
8. Training and education policy. JobTrainer, apprenticeship subsidies and the HECS-HELP changes directing students towards STEM raise human capital, lowering structural unemployment and supporting both growth and equity.
9. Judgement. Labour market policies have been effective for growth and competitiveness, but the same features that delivered wage restraint have concentrated the gains from productivity growth in capital rather than labour. That is a trade-off between the two objectives named in the question, not a coincidence.

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Section IV: extended response

Question 27: compare how inflation affects individuals, firms and government

The verb is compare, which is not the same as describe. You must draw out similarities and differences in how the three groups are affected. A response that gives three separate lists cannot reach the top band no matter how detailed the lists are.

Thesis. Inflation reduces the real value of money for all three groups, but its distributional effect depends on each group's exposure. Individuals are affected as consumers, wage earners, savers and borrowers; firms as price-setters facing both rising costs and rising revenues; and government as a debtor whose revenue base rises automatically with the price level. Inflation therefore redistributes rather than uniformly harms.

Structure by effect, comparing across groups within each, rather than by group.

Real value of money.

• Individuals lose purchasing power. If nominal wages lag prices, real wages fall.
• Firms face rising input costs but can raise output prices, so the net effect depends on their market power and cost structure.
• Government sees the real value of its existing debt fall, making it the largest single beneficiary of unexpected inflation.

Debtors against creditors. The critical comparison. Inflation transfers wealth from creditors to debtors, because debts are repaid in dollars worth less than those borrowed.

• Individuals: mortgaged households gain, while savers, retirees on fixed incomes and holders of cash lose.
• Firms: highly geared firms gain, while firms holding cash reserves lose.
• Government: a net debtor, so it gains, through the mechanism sometimes called the inflation tax.

Income and revenue.

• Individuals are pushed into higher tax brackets by nominal wage rises, which is bracket creep, so their average tax rate rises without any legislated change and real disposable income falls twice over.
• Firms may see nominal revenue rise, but face uncertainty in pricing and contracting, which discourages long-term investment.
• Government gains revenue from bracket creep and from GST levied on higher prices. This is the sharpest contrast in the question: bracket creep is a cost to individuals and a benefit to government, the same mechanism with opposite signs.

Uncertainty and decision-making.

• Individuals bring forward purchases, reducing saving.
• Firms face difficulty distinguishing relative price changes from general inflation, which distorts investment and inventory decisions and raises menu costs.
• Government faces pressure to act, and the policy response of higher interest rates imposes further costs on the other two groups.

International competitiveness. Affects all three: firms lose export competitiveness, individuals lose employment in traded industries, and government faces a deteriorating current account.

Distribution. Inflation is regressive, because low-income households spend a larger share of income on necessities such as food, energy and rent, where price rises have been sharpest, and they have less capacity to hold inflation-hedging assets. Inflation therefore widens inequality among individuals, while its effect on firms depends on market power and its effect on government is broadly favourable.

Conclusion. Individuals bear the largest net cost, firms face an ambiguous effect determined by their ability to pass on costs, and government is the group most likely to benefit. That is precisely why control of monetary policy was given to an independent central bank rather than left with the treasury.

Question 28: reasons for differences between nations in growth and development

Analyse, so the response must draw out relationships between the factors instead of listing them.

Thesis. Differences in growth and development between nations arise from the interaction of resource endowments, institutional quality, human capital, integration with the world economy and global economic structures, with institutions the underlying determinant, since they govern whether the other factors are converted into sustained development.

The plan:

1. Define and distinguish growth, meaning rising real GDP, from development, meaning a broader concept encompassing health, education and living standards, measured by HDI. Establish that the two can diverge, since some resource-rich economies show high GDP per capita with poor development outcomes.
2. Institutional and political factors. Rule of law, secure property rights, enforceable contracts, low corruption and political stability reduce investment risk and enable long-horizon capital commitment. Their absence is the common feature of persistently low-income economies, and this is the factor that mediates all the others.
3. Resource endowment, and why it is not decisive. Compare resource-rich economies with divergent outcomes: Norway and Botswana converted mineral wealth into development through sovereign wealth funds and institutional quality, while others experienced the resource curse, with currency appreciation crowding out other tradeable industries, revenue volatility, and rents captured by elites. The comparison shows endowment matters far less than what institutions do with it.
4. Human capital. Education and health raise labour productivity and are simultaneously the goal of development and an input to growth, producing a virtuous circle in successful economies and a poverty trap in unsuccessful ones, where low income prevents the investment that would raise income.
5. Capital accumulation and technology. Low-income economies have low savings, so low domestic investment. FDI can substitute, but it flows towards economies that already have institutions and infrastructure, which is why capital does not flow uniformly from rich to poor countries as simple theory predicts.
6. Global economic integration. Economies integrated into world trade and investment on favourable terms, including the East Asian tigers, China and Vietnam, grew far faster than those that pursued import substitution or were excluded. Integration also transmits the international business cycle and financial contagion.
7. Global structures. Agricultural protection in advanced economies excludes developing-country exporters from markets where they hold comparative advantage. Terms of trade for primary commodity exporters have trended down over the long run. Debt servicing absorbs government revenue that would otherwise fund health and education.
8. Demographic, geographic and historical factors. Rapid population growth dilutes capital per worker. Landlocked geography and tropical disease burdens raise the cost of trade and lower productivity. Colonial history shaped institutions and infrastructure in ways still visible.
9. Synthesis. Compare two economies concretely, for example China's staged liberalisation with strong state capacity against a Sub-Saharan African economy with comparable starting income but weaker institutions. The factors are not independent: institutions determine whether resources fund development, human capital determines whether foreign technology can be absorbed, and integration determines whether growth is sustained. Development results from their interaction, not from adding up their separate contributions.

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What to do with this paper

Do it timed and closed-book first. Mark against NESA's published guidelines before reading any of the above, then classify every lost mark as knowledge, verb, data, timing or diagram.

Two specific drills from this paper. First, the tariff graph in Questions 19 and 20: practise reading whether imports are zero at a given price before you calculate anything. Second, Question 27's verb. Take any past essay you have written on "the effects of X on individuals, firms and government" and rewrite it structured by effect instead of by group. That single change is usually worth two or three marks.

Related: 2025 worked solutions · 2024 worked solutions · 2023 worked solutions · The complete diagram guide

Questions are described rather than reproduced. The 2022 examination paper and marking guidelines are © NSW Education Standards Authority and are available free from the NESA website. Answers verified against the official marking guidelines; explanations are our own.