2022 H2 Economics Paper 2 Essay 2: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains, with diagrams, why an increase in GST and a fall in household incomes each cause a fall in expenditure on luxury goods, then asks whether the GST increase is likely to raise tax revenue and whether it will lead to unintended consequences.
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With the aid of diagrams, explain why an increase in GST and a fall in the incomes of many households are each expected to cause a fall in expenditure on luxury goods.
Defining the elasticities. Price elasticity of demand measures the responsiveness of quantity demanded to a change in the good's own price, ceteris paribus. Income elasticity of demand measures the responsiveness of demand to a change in income, ceteris paribus. Luxury goods, such as cars in Singapore or designer handbags, are both price elastic, because they have a low degree of necessity and take up a large share of income, and income elastic.
An increase in GST. GST is an ad valorem tax. An increase in GST raises producers' costs, since the GST is eventually payable to the government, so supply falls and the supply curve pivots leftward from SS0 to SS1, with the pivot reflecting the ad valorem nature of the tax. Price rises from P0 to P1. Because demand for luxury goods is price elastic, the rise in price causes a more than proportionate fall in quantity demanded from Q0 to Q1. With quantity falling more than proportionately to the price rise, total expenditure on luxury goods falls, from the area 0P0BQ0 to the smaller area 0P1AQ1.
A fall in household incomes. A fall in incomes reduces consumers' purchasing power, so demand for luxury goods falls and the demand curve shifts leftward from DD0 to DD1. Because luxury goods are income elastic, the fall in demand is more than proportionate to the fall in income. This leads to a large fall in expenditure on luxury goods, from the area 0P0CQ0 to the smaller area 0P1DQ1.
Both the GST increase and the fall in household incomes therefore each lead to a fall in expenditure on luxury goods.
Define PED and YED, treat luxuries as price and income elastic, and use a tax driven supply pivot and an income driven demand shift to show expenditure falling in each case.
Tests: PED and PES, YED and XED
Discuss whether this increase in GST is likely to raise tax revenue and whether it will lead to unintended consequences.
- Set up how the higher GST rate raises revenue in principle, then make the outcome depend on how consumers respond.
- Distinguish the revenue effect on necessities from the revenue effect on luxuries using their different elasticities.
- Reason to an overall revenue judgment using the relative shares of spending and the behaviour of higher income consumers.
- Identify the unintended consequences, such as bringing purchases forward, tax avoidance, and the regressive distributional effect.
- Note the compensatory measures that could offset the distributional effect and their limits.
- Conclude with a judgment on whether revenue rises and how serious the unintended consequences are.
This part is gated. The full model answer with the worked analysis and the evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
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Where can I get the full worked answers to the 2022 H2 Economics paper 2 essay 2?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2022 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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