What this lesson teaches
I can explain how changes in the determinants of C, I, G and (X - M) shift aggregate demand.
Syllabus 9570, 3.1.2(b). Aggregate Demand and Aggregate Supply: How AD is affected by changes in the determinants of C, I, G and (X - M)
I can use AD and AS to find the equilibrium national output and general price level.
Syllabus 9570, 3.1.2(d). Aggregate Demand and Aggregate Supply: How interaction of AD and AS determines equilibrium level of national output and general price level
I can explain how a change in AD has a multiplied effect on national income.
Syllabus 9570, 3.1.2(e). Aggregate Demand and Aggregate Supply: How changes in the components of AD can have a multiplied effect on national income
Make a guess
Foreign tourists spend $5 billion in a country. Which part of its AD rises?
- Exports (X), because foreigners buy its services.
- Consumption (C), because the money is spent in shops.
- Government spending (G), through tourist taxes.
Show the answer
Exports (X), because foreigners buy its services.
Spending by foreign visitors on hotels and meals is an export of services, even though it happens at home.
A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.
This is a complete case study in exam format. It is about a tourism-dependent economy recovering after the pandemic. It has six parts worth 30 marks, like each H2 case study. In the exam you have 2 hours 30 minutes for two case studies, so allow about 75 minutes for this one, including reading time.
The figures for Thailand in Extract 1 are real. Country T and every number in Figure 1 and Table 1 are illustrative: invented for practice, not official data.
Allow about an hour. Read the data and all three extracts first. Write each answer before you open its suggested answer, and use the level descriptors below to mark the 8- and 10-mark parts.
The extracts
Extract 1: Thailand's lost tourists
In 2019, Thailand welcomed about 40 million foreign visitors, and tourism was one of the largest parts of its economy. In 2020, when borders closed during the COVID-19 pandemic, arrivals fell by more than four-fifths. Hotels closed, and many workers in tourist areas went back to their home villages. When borders reopened, arrivals recovered steadily, but it took several years to approach the 2019 level. Written for these notes from public information.
Extract 2: Country T's cautious households
Households in Country T borrowed heavily during the pandemic to get by, and many now spend a large part of their income repaying debts. To lift spending, the government has proposed giving every adult a one-off cash handout. Supporters say it will boost shops and restaurants quickly. Critics say many families will use it to repay loans, and that the money would do more good if spent on new railways and ports. Written for these notes; Country T is invented.
Extract 3: Not enough hands
As tourists return to Country T, hotels and restaurants say they cannot find enough staff, because many workers found other jobs during the pandemic. Some hotels have kept rooms closed for lack of cleaners and cooks, and wages in the industry are rising. Tour firms are buying new buses, and developers are building hotels near the beaches. Written for these notes; Country T is invented.
How the 8- and 10-mark parts are marked
Data parts (1 to 3 marks)
Point-marked. A 'describe' or 'compare' part gives 1 mark for the overall pattern and 1 for a refinement or a difference, with figures. A 'calculate' part gives marks for the working and the answer.
8 marks: L2 (4 to 6)
Both sides are explained with clear AD/AS reasoning and tied to evidence from the case. A top L2 answer develops both sides fully.
8 marks: L1 (1 to 3)
One-sided, or points listed without explanation, or little use of the case.
8 marks: E (1 to 2)
E2: a reasoned judgement in the context of the case that says what the answer depends on, such as spare capacity. E1: a judgement that is stated but not explained.
10 marks: L2 (4 to 7)
Both policies are analysed with developed chains, including the multiplier and effects on AS, their limits and case evidence. If only one policy is developed, the answer is usually capped at about 5.
10 marks: L1 (1 to 3)
Mostly descriptive, one-sided, or not tied to the case.
10 marks: E (1 to 3)
E3: a well-reasoned judgement on which policy better raises national income, considering the time frame and Country T's situation, with a conclusion. E2: a reasoned judgement with less support. E1: an unsupported judgement.
| Year | 2019 | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|---|
| Arrivals | 40 | 1 | 11 | 28 | 35 | 38 |
| Year | Real GDP growth | Growth in household consumption | Unemployment rate |
|---|---|---|---|
| 2022 | 2.5 | 6.0 | 1.3 |
| 2023 | 2.0 | 7.0 | 1.0 |
| 2024 | 2.5 | 4.5 | 1.0 |
| 2025 | 2.2 | 2.0 | 1.1 |
Worked example: The multiplier in numbers
Suppose tourists spend an extra $10 billion in a country, and its marginal propensity to withdraw (MPW) is 0.5.
- Multiplier = 1 / MPW = 1 / 0.5 = 2.
- Final rise in national income = 2 x $10 billion = $20 billion.
- If MPW were 0.8, the multiplier would be 1.25 and the rise only $12.5 billion.
- So the more each round leaks into savings, taxes and imports, the smaller the final effect.
Watch out for this
Tourists spending money in Country T counts as consumption in its national income.
Spending by foreign visitors is an export of services, so it is part of X in AD. Consumption (C) is spending by the country's own households.
Check your understanding
If households use most of a cash handout to repay debts, what happens to the multiplier effect?
- It is unchanged, because the handout raises incomes by the same amount.
- It is small, because little of the handout is spent in the first round.
- It is large, because repaying debt gives banks more money to lend out again.
Show the answer
It is small, because little of the handout is spent in the first round.
Right. Repaying debt is a withdrawal, like saving, so less income is passed on as spending and the multiplier effect shrinks.