OCR A Level Economics: Purchasing power parity and the Marshall-Lerner condition (H460) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover the second half of the topic Exchange rates in the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021: PPP, managing the exchange rate, the Marshall-Lerner condition, the J-curve, competitiveness and the effectiveness of changing a currency’s value. The specification does not mark any of this content as AS or Extension. All countries, currencies and figures are invented and illustrative.

Revise with the study guide and revision notes. See also the OCR Economics hub, the checklist and the free diagnostics.

Questions

1. State what relative purchasing power parity predicts about the exchange rates of two countries with different inflation rates. [2]

2. A basket of goods costs 330 ceds in Country C and 220 dels in Country D. The market exchange rate is 1.80 ceds per del.

(a) Calculate the PPP exchange rate. [2] (b) State whether the del is overvalued or undervalued against the ced on this measure, and by what percentage of the PPP rate. [2]

3. Using the rate of 1.80 ceds per del, Country C has inflation of 8% and Country D has inflation of 3%. Use relative PPP to forecast the new exchange rate, and describe the movement of each currency. [3]

4. Explain two reasons why the actual exchange rate between two currencies may differ from the PPP rate. [6]

5. In Country E, a depreciation cuts the foreign price of exports by 12% and export volume rises 15%. The home price of imports rises 12% and import volume falls 6%.

(a) Calculate the price elasticity of demand for exports and for imports. [2] (b) State the sum and say whether the Marshall-Lerner condition is met. [2]

6. Country A has balanced trade. It exports 800 units at 50 each and imports 500 units at 80 each, both values in its own currency. A depreciation of 8% raises the home price of imports by 8%. Exporters keep their home price. PEDx = 0.7 and PEDm = 0.4. Calculate the new trade balance. [5]

7. Explain why the trade balance of an economy might worsen before it improves after a depreciation. [4]

8. The table shows the invented trade balance of Country G, in billions of its currency, from the quarter of a depreciation (quarter 0).

Quarter	0	1	2	3	4	5
Balance	−1.5	−2.4	−2.9	−2.2	−1.3	−0.2

(a) Identify the quarter with the lowest balance and state how far it is below the starting balance. [2] (b) Calculate the total shortfall against the starting balance across quarters 1 to 3. [2] (c) State the first quarter in which the balance is better than at the start. [1] (d) Explain what the pattern suggests about elasticities of demand for exports and imports. [2]

9. Country H exports a machine at 120 hals. 1 hal buys 0.80 mels, and the hal falls to 0.72 mels.

(a) Calculate the price of the machine in mels before and after, and the percentage change. [3] (b) The machine uses a component costing 45 mels. Calculate its price in hals before and after. [2] (c) Use your answer to (b) to explain why the exporter’s gain may be smaller than the fall in the mel price suggests. [1]

10. Country A has high unemployment. Evaluate whether a depreciation of its currency will reduce unemployment. [8]

11. Evaluate whether a government should manage its currency to keep it low in order to improve international competitiveness. [10]

12. Country J’s net exports rise by 4 billion units after a depreciation. Of each extra unit of income, 0.15 is saved, 0.15 is taxed and 0.10 is spent on imports. GDP is 250 billion. Imports are 30% of the consumer price basket and import prices rise 9%.

(a) Calculate the multiplier and the rise in national income. [2] (b) Express the rise as a percentage of GDP. [1] (c) Calculate the rise in the price level. [2] (d) Comment on the result. [1]

Answers

1. The exchange rate changes by about the difference between the inflation rates [1]. The currency of the higher-inflation country depreciates [1]. [2] Examiner insight: A bare statement that rates “follow prices” gives no direction. Name which currency falls and say that it is the inflation gap, not the level, that drives the change.

2. (a) PPP rate = 330 / 220 [1] = 1.50 ceds per del [1]. (b) The market rate (1.80) is above 1.50, so the del is overvalued [1]. (1.80 − 1.50) / 1.50 = 20% [1]. Examiner insight: Divide the gap by the PPP rate, not the market rate; 0.30 / 1.80 gives a different percentage. State the currency unit in your answer.

3. New rate = 1.80 × 1.08 / 1.03 [1] = 1.887 ceds per del [1]. The del appreciates by about 4.9% and the ced depreciates [1]. [3] Examiner insight: Keep the direction straight: more ceds per del means the ced is worth less. Say both currencies, since the question asks for the movement of each.

4. Any two reasons, each worth three marks for identification, development and link.

• Non-tradable goods [1]: services such as local rents or haircuts cannot be traded across borders [1], so their price gaps are not arbitraged and goods prices do not equalise, leaving the rate away from PPP [1].
• Capital flows [1]: interest rate differences and speculation move money between countries [1], so the demand for a currency reflects financial flows and not only goods prices [1].
• Other valid reasons: transport costs and trade barriers, differentiated products, and different baskets. Examiner insight: A named reason alone stays at a statement. Developed points finish with the effect on the exchange rate, which is what the question asks.

5. (a) PEDx = 15 / 12 = 1.25 [1]; PEDm = 6 / 12 = 0.5 [1]. (b) Sum = 1.75 [1], which exceeds 1, so the condition is met and the trade balance improves [1]. Examiner insight: Treat both elasticities as positive. The comparison with 1 is what answers the question, so say it explicitly.

6. Export volume rises 0.7 × 8 = 5.6% to 844.8 [1]. Export revenue = 844.8 × 50 = 42,240 [1]. New import price = 80 × 1.08 = 86.40 [1]. Import volume falls 0.4 × 8 = 3.2% to 484 [1]. Import cost = 484 × 86.40 = 41,817.6, so balance = 42,240 − 41,817.6 = about +422 [1]. [5] Examiner insight: Show each volume and price before multiplying. The sum of elasticities is 1.1, so a small surplus is the expected result, which gives you a check on your arithmetic.

7. A depreciation raises the home price of imports and lowers the foreign price of exports [1]. In the short run demand is inelastic because of existing contracts, habits and slow supplier changes [1]. Import bills rise more than export revenue, so the balance worsens [1]. Over time elasticities rise, the Marshall-Lerner condition is met and the balance improves [1]. [4] Examiner insight: Link each stage with a cause. Saying “the J-curve happens” repeats the question; the reason is the difference between short-run and long-run elasticities.

8. (a) Quarter 2 [1]; 1.4 below the starting balance (2.9 − 1.5) [1]. (b) Shortfalls: 0.9 + 1.4 + 0.7 [1] = 3.0 billion [1]. (c) Quarter 4 (−1.3 against −1.5) [1]. (d) In the short run elasticities are low, so the balance worsens [1]; later they rise and the Marshall-Lerner condition is met [1]. Examiner insight: Measure from the starting balance, not from zero. For part (d) use the data to support the point, quoting the trough and the recovery.

9. (a) Before: 120 × 0.80 = 96 mels [1]; after: 120 × 0.72 = 86.40 mels [1]; change = −10% [1]. (b) Before: 45 / 0.80 = 56.25 hals [1]; after: 45 / 0.72 = 62.50 hals [1]. (c) The component costs 6.25 hals more per machine, so costs rise and the exporter keeps less of the gain [1]. [6] Examiner insight: Convert imports by dividing and exports by multiplying with the same quote. Using the same calculation for both is a common slip.

10. Chain of reasoning, up to 4 marks: depreciation lowers the foreign price of exports and raises import prices [1]; if the Marshall-Lerner condition holds, net exports rise [1]; aggregate demand rises, with a multiplier effect [1]; firms raise output and hire, so unemployment falls [1]. Evaluation, up to 4 marks: the J-curve delays the gain [1]; unemployment may be structural, so extra demand will not remove it [1]; dearer imported inputs raise costs and may reduce hiring [1]; the final judgement is supported by spare capacity, elasticities and time [1]. [8] Examiner insight: Apply the analysis to unemployment itself, not just to exports. Evaluation earns credit when you state what the answer turns on, such as spare capacity or elasticities. A bare list of pros and cons does not do that.

11. Analysis, up to 4 marks: a low rate cuts foreign prices of exports [1]; raises sales and output if elasticities are high [1]; protects firms against imports [1]; central bank intervention or low interest rates are the tools [1]. Evaluation, up to 6 marks: dearer imports and imported inflation [1]; lower living standards [1]; reserves and the cost of holding them [1]; retaliation by partners [1]; non-price factors such as quality matter in the long run [1]; reasoned judgement that depends on elasticities, time and the economy’s structure [1]. [10] Examiner insight: A long answer with a one-sided case rarely shows evaluation. Weigh the short-run gain against the long-run costs, and reach a conclusion that follows from your argument.

12. (a) Withdrawals = 0.15 + 0.15 + 0.10 = 0.40, so multiplier = 1 / 0.40 = 2.5 [1]; income rises by 4 × 2.5 = 10 billion [1]. (b) 10 / 250 = 4.0% [1]. (c) 0.30 × 9 = 2.7% [1], using the share of imports in the basket [1]. (d) Output gains of 4.0% come with a 2.7% rise in prices, showing the trade-off between growth and inflation [1]. [6] Examiner insight: Add all three withdrawals before dividing. A comment should use both of your results, not just restate them.

Where marks are usually lost

• Dividing the PPP gap by the market rate instead of the PPP rate.
• Reversing the exchange rate quote, so a depreciation seems to raise export prices abroad.
• Adding PEDx and PEDm but not comparing the sum with 1.
• Explaining the J-curve without naming short-run elasticity.
• Describing PPP without any evaluation.
• Calculation answers with no units or no working shown.
• Evaluation as a list rather than a judgement tied to conditions.
• Leaving out the multiplier or imported inflation in the macro chain.

Next steps

• Review the revision notes and the study guide.
• Go to the OCR Economics hub and the checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. Component 2, Macroeconomics: area of study The global context, topic Exchange rates (purchasing power parity, managing the exchange rate, the Marshall-Lerner condition and J-curve, competitiveness, and effectiveness of changing the value of a currency).