2
3
(a) Is the information on inflation in the text supported by the figures in the tables?
Section A
(b) Identify the evidence in the article that might be used to give support to the passing of
legislation to limit wage increases.
[3]
Answer this question.
Question 1
[3]
(c) (i)
An economic report on Belgium
(ii)
The following information was taken from a bank report on Belgium dated August 2000.
Stronger activity, rising oil and commodity prices and a weak currency have brought accelerating
inflation. Cost and demand pressures, however, should be restrained as the effects of higher oil prices
fade and wage increases are limited by legislation.
Belgium is one of the most open economies in Europe. As a percentage of national income, exports
and imports of goods are about three times the European average of 25%. Exports have been
prominent in the increased economic growth in the last year. Trade and current accounts have
remained in surplus and increased growth in output has led to an improvement in public finances,
which may result in the budget deficit being eliminated this year.
Describe the changes in the composition of GDP by sector between 1980 and 1999. [2]
Discuss whether these changes might be typical of a developed economy.
[6]
(d) Use the article to discuss the advantages and disadvantages to Belgium of having one of ‘the
most open economies in Europe’.
[6]
Section B is on page 4.
In July 2000 annual inflation rose to 2.8% from under 1% in July the previous year, but (given the
availability of spare capacity and the restraint imposed on wages by new legislation) labour costs have
been prevented from increasing. Job creation in the public sector has assisted the growth in
employment, which should result in a further growth in consumption as personal disposable incomes
rise.
Table 1 Key Variables
average
forecasts
1993-97
1998
1999
2000
2001
2002
growth in real GDP (%)
1.7
2.7
2.5
3.7
3.5
3.0
inflation (%)
2.1
1.0
1.1
2.5
2.2
2.3
1980
1990
1999
62
71
76
2
2
1
industry
36
30
28
services
62
68
71
Table 2 Composition of GDP
exports as % of GDP
composition of GDP by sector (%)
agriculture
9708/4/M/J/02
9708/4/M/J/02
[Turn over
2
4
Section A
Answer this question.
1
Cigarette Consumption
For many years health campaigners have urged governments to act against smoking. In economic
terms, one of their concerns is that the smoking of cigarettes generates negative externalities.
Governments have responded in a number of ways: there are restrictions on who can buy
cigarettes, where they can be consumed and how they can be advertised. Packs of cigarettes
have health warnings printed on them and heavy indirect taxes have been imposed. (In the UK, 80
per cent of the price of a pack may go to the government.) It has been estimated that a 10 per cent
increase in the price leads to a 4 per cent fall in consumption, and the weighting of tobacco in the
UK Retail Price Index has been reduced from 60 in 1971 to 34 in 1998. Although smoking rates
have fallen in the UK, health campaigners remain dissatisfied and call for still stronger action.
Price and consumption of cigarettes in Canada 1989-1995
Price per pack
(US$)
7
Annual consumption
per capita (packs)
90
80
6
70
5
60
4
50
3
40
2
1
30
Real price
Consumption
0
20
10
0
1989 1990 1991 1992
1993 1994 1995
Fig. 1
(a) (i)
(ii)
(b) (i)
(ii)
Sketch a normal demand curve for a good or service.
[2]
Explain whether Fig. 1 confirms that cigarettes would have a normal demand curve. [3]
Using the data in the text, calculate the price elasticity of demand for cigarettes.
[2]
How might this value be explained?
[3]
(c) Explain, with examples, what is meant by the statement that the consumption of cigarettes
generates negative externalities.
[4]
(d) Discuss whether high indirect taxes are the best way to discourage smoking.
[6]
Copyright Acknowledgements:
Question 1
9708/2/O/N/02
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
4
Section A
Answer this question.
1
Malaysian Trade
Tables 1 and 2 show selected data about Malaysia’s international trade and were produced by the
Department of Statistics and the Central Bank. Table 1 is valued in Malaysian ringgits (RM) and
US dollars (US$). The figures in Table 2 are valued in Malaysian ringgits (RM).
Table 1 Current account balance
(RM billions)
Current balance
(US$ billions)
2000
2001*
2000
2001*
31.2
22.1
8.2
5.8
Table 2 Exports and imports (RM billions) of visible items
2000
2001*
Gross exports,
of which
Manufactures
Minerals
Agriculture
373.3
391.5
317.9
26.8
22.9
344.9
20.8
20.0
Gross imports,
of which
Capital goods
Intermediate goods
Consumption goods
312.4
338.7
47.1
230.6
17.4
52.0
246.6
18.8
*Forecasts
(a) (i)
(ii)
What change was forecast for the current balance between 2000 and 2001?
[2]
How did the visible items, shown in Table 2, contribute to this change?
[2]
(b) How might economic theory explain the composition of visible exports?
[2]
(c) Should the Malaysian government be concerned about the figures for visible imports?
[4]
(d) Identify two other pieces of data needed to calculate the overall balance of payments.
[2]
(e) What happened to the ringgit/dollar exchange rate between 2000 and 2001?
[2]
(f)
Discuss whether an appreciation in the exchange rate of the ringgit would help the Malaysian
government to control inflation and improve the current account.
[6]
Copyright Acknowledgements:
Question 1
9708/02/M/J/03
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i)
Answer this question.
1
(ii)
How does the data in Figure 2 help to explain the behaviour of the price of coffee
between 1997 and 2000?
[3]
(b) (i)
With the help of a diagram, explain how the coffee retention scheme was intended to
affect the market for coffee.
[4]
The World Coffee Market
The recent expansion of Asian coffee producers in the world market has caused major price
changes. The Association of Coffee Producing Countries (ACPC), led by Brazil, agreed a coffee
retention scheme in 2000. Under the scheme, members undertook to hold back 20% of their
exports.
The coffee crop for 2000/2001 was 113 million bags and world consumption was 102 million bags,
with supply growing at 3.5% per annum and demand at 1.5% per annum. Alternative measures to
reduce this surplus were under discussion.
The ‘Fairtrade’ organisation has been set up in western coffee-consuming countries to guarantee
fair prices to coffee producers in an effort to raise their living standards. At the end of 2000 the
guaranteed price was more than three times the current world market price. ‘Fairtrade’ buys
directly from growers, who would otherwise have to sell through a chain of dealers. These dealers
might be expected to seek profits for themselves. However, in 2000 only 0.5 million of the world’s
10 million coffee growers were part of the scheme. Sales of ‘Fairtrade’ coffee in countries such as
the UK have been growing rapidly despite the higher price charged for the retail coffee.
2
2000
0
Jan
Mar
May
Jul
Sep
Fig. 1
Nov
(a) Explain what is meant by labour productivity, and show how changes in labour productivity
may affect an economy’s production possibility curve.
[8]
(a) Explain the effect of the removal of an indirect tax upon the market for a product.
4
(a) Explain what may cause a country’s terms of trade to change.
120
110
Bags (million) 100
90
0
1997 98
99 2000
Production
Consumption
Fig. 2
9708/2/O/N03
[8]
[8]
(b) Discuss whether a worsening in a country’s terms of trade will cause a worsening of its
balance of trade.
[12]
Coffee production and consumption
80
[6]
(b) Discuss whether an indirect tax is a satisfactory way to tackle a negative externality, such as
air pollution.
[12]
1999
50
Identify one alternative measure to reduce the surplus and explain how it might operate.
[3]
(b) Discuss whether increased division of labour among workers and nations brings only
benefits.
[12]
1998
Price (US cents/lb) 100
(iii)
[2]
Answer one question.
3
1997
Suggest two problems of operating a successful retention scheme.
Section B
The world market price of coffee
200
(ii)
(c) Discuss how far the ‘Fairtrade’ scheme may solve the problems of coffee growers.
Figures 1 and 2 show aspects of the world coffee market between 1997 and 2000.
150
What, according to Figure 1, happened to the price of coffee between the start of 1997
and the end of 2000?
[2]
9708/2/O/N03
2
3
Figs 1 and 2 show the rates of inflation in Jamaica and the UK between 1989 and 2000.
Section A
Answer this question.
1
100
Inflation in Jamaica and the UK
80
In August 2001 the Bank of Jamaica reported that the monthly rate of inflation in Jamaica for June
2001 had been 1.7% and that the Consumer Price Index (CPI) stood at 1404 compared to its base
figure in 1988.
Annual 60
%
rate 40
Table 1 gives the monthly inflation rate for each of the different groups of products included in the
Jamaican CPI and the percentage weights of each group. It also gives the weights for the same
groups in the UK Retail Price Index (RPI) for the same year.
20
0
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
Table 1
Jamaican CPI
Product group
Food and drink
Fuels and other household supplies
Housing and other housing expenses
Household furnishings and furniture
Healthcare and personal expenses
Personal clothing, footwear, etc
Transport
Miscellaneous expenses
All groups
Monthly inflation %
Weight*
UK RPI
Weight*
0.7
0.4
–1.3
0.8
0.5
0.3
22.6
0.2
1.7
56
7
8
3
7
5
6
8
100
29
11
16
7
4
7
15
11
100
Fig. 1 Inflation in Jamaica
10
8
Annual
%
rate
6
4
2
0
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
*rounded to percentages
Fig. 2 Inflation in the UK
(a) What happened to the Consumer Price Index in Jamaica between 1988 and 2001?
[2]
(b) Choose two product groups from Table 1.
Explain for each of these two product groups one possible reason for the difference in the
weights between Jamaica and the UK.
[4]
© UCLES 2004
9708/02/M/J/04
(c) (i)
Explain whether food and drink or transport contributed more to the monthly inflation rate
in Jamaica in June 2001.
[4]
(ii)
Comment on the effect of the change in the price of housing and other housing expenses
on the monthly Jamaican inflation rate in June 2001.
[2]
(d) Compare inflation in Jamaica and the UK between 1989 and 2000.
[2]
(e) Discuss whether inflation is always caused by government action.
[6]
© UCLES 2004
9708/02/M/J/04
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4
2
Section A
Answer this question.
1
Two Asian Giants
China has the world’s largest population and is experiencing rapid economic growth from a low
base. It has recently joined the World Trade Organisation (WTO) with an obligation to open its
economy to freer international trade.
In 2002 an economic spokesman for neighbouring Japan stated that this did not mean that China
was a threat to Japan’s position as ‘the factory of the world’. He claimed that China was a labourintensive, low-cost producer, while Japan was ahead in technology-intensive products. He quoted
television production, where Japan specialised in high quality models, while China produced
standard models. Engineering and electronics showed similar positions. He argued that Chinese
export competitiveness was based on cheap labour which reflected poor labour productivity. He
added that half of Chinese exports were produced by subsidiaries of foreign firms, many of them
Japanese. However, he warned that the presence of these subsidiaries might lead to an increased
transfer of technology to China.
Table 1 shows some economic aspects of the two countries in 2000.
Table 1
Population (millions)
Gross Domestic Product (GDP) (US$bn)
Consumer price inflation %
Average annual % inflation rate in previous 10 years
Current account balance (US$bn)
Current account balance as % of GDP
Exports of goods (US$bn)
Imports of goods (US$bn)
Japan
China
126
4,753
–0.7
0.8
116.9
2.5
459
343
1,260
1,099
0.4
7.1
10.2
0.9
249
216
(a) Suggest two steps that a country might take to open its economy to freer international trade.
[2]
(b) (i)
Explain why the comparative advantage of Japan and China differs.
[4]
(ii)
Compare the importance of international trade to the two countries.
[4]
(c) Comment on the inflation figures for the two countries.
[4]
(d) Discuss whether China offers an economic threat or opportunity to Japan.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2004
9708/02/O/N/04
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
(a) Show how Fig. 1 supports the view that the prices of precious metals change dramatically. [2]
Section A
Answer this question.
1
(b) Explain one reason for the increased demand for gold in 2002.
[2]
(c) Draw a diagram to show why the price of platinum rose in 2002.
[3]
(d) (i)
[2]
The Market for Precious Metals
The prices of precious metals such as gold, platinum and palladium are determined by supply and
demand. This can result in dramatic price changes. Fig. 1 shows their price movements, as index
numbers, during 2002.
Precious metal prices
(ii)
Define price elasticity of supply.
What does the data suggest about the nature of the price elasticity of supply of precious
metals?
[2]
(e) How may the price behaviour of palladium and platinum, shown in Table 1, have been linked?
[3]
1 Jan 2002 = 100
(f)
150
Discuss the possible effects on the South African economy of the rise in the prices of gold
and platinum.
[6]
Platinum
125
Gold
100
75
Palladium
50
J F M A M J J A S O N D
2002
Fig. 1
Many influences were at work in the markets during this period. Demand for gold as an investment
increased as economic conditions became uncertain, interest rates fell and stock markets
collapsed. Platinum prices were affected by increasing sales of diesel cars, which must use
platinum in their catalytic converters, and the reduction of exports of platinum by Russia. Supplies
of precious metals can easily be increased from stocks, but when these are low it is more difficult
to expand supply.
Palladium is a substitute for platinum in catalytic converters for cars using petrol (gasoline).
Palladium and platinum prices have behaved very differently, as shown in Table 1.
Table 1 Prices of palladium and platinum (US$ per ounce)
December 2000
January 2003
Palladium
US$ 1100
US$ 250
Platinum
US$ 600
US$ 700
South Africa is a leading supplier of precious metals. In 2002 gold and platinum made up 25% of
its export earnings. The price changes of the metals helped push up the exchange rate of the
South African currency by 40% against the US$.
© UCLES 2005
9708/02/M/J/05
© UCLES 2005
9708/02/M/J/05
[Turn over
2
3
(a) State one way in which a customs union and a free trade area are the same and one way in
which they differ.
[2]
Section A
Answer this question.
(b) (i)
1
Compare the behaviour of the Mexican and Argentine exchange rates against the US$ in
the period shown in Fig. 1.
[2]
Economic developments in Mexico and Argentina
(ii)
There are both similarities and differences in the ways that Mexico and Argentina have tried to
develop. In 1994 Mexico joined the North American Free Trade Area (NAFTA) with the USA and
Canada. A year later Argentina joined Mercosur, a South American customs union, with Brazil,
Paraguay and Uruguay. Mercosur is the world’s third-largest trading bloc after the European Union
and NAFTA. Both countries have experienced severe economic crises, Mexico in 1995 and
Argentina in 2002. Their experiences of foreign exchange rate movements and inflation have been
very different. Figs.1 and 2 show details of these from 1997 to 1999.
Exchange rates against US$
Consumer price indices
Index, January 1997 = 100
Index, January 1997 = 100
105
160
Explain one possible reason for the trend in the Mexican exchange rate during 1999.
[2]
(iii)
Explain how the fixed level of the Argentine exchange rate would have been achieved.
[3]
(c) (i)
Compare Mexico’s and Argentina’s experience of inflation in the period shown in Fig. 2.
[2]
(ii)
Explain how Mexico’s inflation rate may have influenced the behaviour of its exchange
rate.
[3]
(d) Discuss whether the devaluation of a country’s exchange rate will always improve its balance
of trade position.
[6]
150
100
Argentina
140
95
Mexico
130
90
120
85
Mexico
110
80
75
90
1997
1998
1999
1997
Fig.1
© UCLES 2005
Argentina
100
1998
1999
Fig.2
9708/02/O/N/05
© UCLES 2005
9708/02/O/N/05
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2
3
(a) (i)
Section A
Answer this question.
1
Trade developments between Australia and Thailand
Australian Exports
Total
A$m
2510
Of which:
Australian Imports
Total
What differences were there in the types of goods traded between the two countries?
[2]
(iii)
Explain what might have caused these differences.
[4]
Name two protective measures, other than tariffs, that restrict free trade.
[2]
(ii)
A$m
[2]
(ii)
(b) (i)
Table 1 Trade in goods between Australia and Thailand in 2002,
all valued in Australian Dollars (A$)
Calculate the balance of trade in goods between Australia and Thailand in 2002.
Explain, with the aid of a demand and supply diagram, how the domestic producers of a
good are affected by the removal of a tariff on imports of that good.
[4]
(c) Discuss whether Australia and Thailand should have abolished all tariffs immediately.
[6]
3140
Of which:
Gold
412
Vehicles
541
Aluminium
348
Petroleum
259
Cotton
186
Heating / cooling equipment
240
Dairy products
137
Seafood
221
Crude petroleum
115
Computers
113
In October 2003, Australia signed a trade agreement with Thailand. Under this,
more than half of Thailand’s 5000 import tariffs on Australian goods were abolished
immediately and others were reduced. These tariffs covered Australian exports
worth more than A$700 million in total. Thailand would abolish the remaining tariffs
by 2020. An independent survey predicted that by 2023 these actions would raise
the GDP of Australia by A$12 000 million and that of Thailand by A$46 000 million.
Table 2 Some of the immediate changes in Thailand’s tariffs on
Australian goods
Product
Beef
New Tariff
51%
40%
12-20%
0%
Wine
55%
40%
Large cars
80%
0%
Small cars
80%
30%
Wheat
© UCLES 2006
Old Tariff
9708/02/M/J06
© UCLES 2006
9708/02/M/J06
[Turn over
4
2
Section A
Answer this question.
1
The market for onions in Bangladesh
In Bangladesh the prices of essential foodstuffs usually rise in the period before
religious festivals. In October 2003 the price of onions increased sharply. To deal
with this the Government took three steps:
•
It removed the 22.5% duty on imported onions.
•
It introduced a maximum price ceiling of 18 Taka (Tk) per kilo.
•
It set up a committee which monitored market prices twice each day.
A Government Minister said ‘a kilo of imported onions should cost no more than
Tk14. Then the importer adds a profit of Tk1 per kilo, the wholesaler Tk0.30 and the
retailer Tk2 – this should reflect a just price.’
However, towards the end of October 2003, the maximum price ceiling was
ineffective. Onions were selling on average for Tk28 per kilo, which was
•
90% above the October 2002 price,
•
50% above the September 2003 price and
•
Tk10 above the Government maximum price.
Traders argued that the price increase was the result of low domestic production
and reduced imports. Consumers said that supplies were normal and that traders
had created an artificial crisis, because of the rise in demand before the Holy Month
of Ramadan.
(a) (i)
Calculate the approximate price per kilo of onions in September 2003.
[2]
(ii)
Identify two reasons why prices might normally be expected to rise before the Holy
Month of Ramadan.
[2]
(iii)
What might the Minister have meant by ‘a just price’?
[2]
(b) (i)
With the aid of a demand and supply diagram, explain how traders may benefit from
reducing the supply of essential foodstuffs.
[4]
(ii)
With the aid of a demand and supply diagram, analyse the effect on the market for
onions of the introduction of an effective maximum price.
[4]
(c) Discuss the desirability of the Government’s intervention in the market for onions.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2006
9708/02/O/N/06
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i) Draw a production possibility curve to show the trade-off between the provision of
educational and popular television programmes. Explain the possible effects if more
money is available to the programme makers from increased licence fees.
[3]
Answer this question.
1
The British Broadcasting Corporation
(ii) Explain how an increase in the licence fee to receive television programmes may affect
the market for television sets.
[4]
The British Broadcasting Corporation (BBC) is a world-famous radio and television broadcaster.
(b) How does Fig. 1 support the view that the BBC creates more value than viewers pay for? [4]
In 2005 the services the BBC provided to the UK were part of the public sector and financed mainly
by a compulsory annual licence fee of £121 on those households owning a television. There were
heavy fines for those who did not pay.
The BBC has an obligation to provide programmes that are educational and cultural, as well as the
more popular programmes such as comedy and sport.
(c) (i) Comment on the relative positions in Fig. 2 of national defence and police services.
[3]
(ii) Discuss whether it is correct to include education and health as public goods in Fig. 2. [6]
One economist has argued that the BBC should receive more finance, that BBC broadcasting is a
public good, and that it has greater value for viewers than they have to pay for. To support his view he
produced two diagrams. Fig. 1 shows the demand for BBC services among the 23 million televisionowning households in the UK and Fig. 2 shows where this economist placed BBC broadcasting
among a selection of public goods in 2005.
Fig. 1 Demand for BBC services in the UK
annual
licence
fe e
annual licence fe e
£121
demand for B B C services
0
17
23
households (millions)
Fig. 2 Selected public goods
100
national defence
stre et lighting
B B C broadcasting
extent of non-rivalry
(%)
police services
education and he alth
0
100
extent of non-excludability (%)
© UCLES 2007
9708/02/M/J/07
© UCLES 2007
9708/02/M/J/07
[Turn over
2
3
(a) (i) Summarise the performance of the US current account balance between 1980 and 2002.
[2]
Section A
Answer this question.
(ii) Explain how the US might have been able to finance the current account position that it
faced between 1992 and 2002.
[3]
1
US Current Account and US$ Exchange Rate
Fig.1 shows the US current account balance as a % of GDP from 1980 to 2002, a period in which
US GDP rose continuously. Fig. 2 shows the US$ exchange rate against the euro for the same
period.
(b) Suppose a country has a surplus on its current account. Explain how this might affect its
exchange rate.
[3]
F ig. 1 U S c urre nt a c c o u nt b ala n c e a s % of G D P 1980 to 2002
%
1
(c) (i) Outline how a depreciation of a country’s exchange rate is likely to affect its current
account balance.
[3]
(ii) Use Fig. 1 and Fig. 2 to analyse whether this expected effect of an exchange rate
depreciation occurred in the case of the US between 1980 and 2002.
[3]
surplus
0
–1
deficit
(d) Discuss whether a government should try to fix its country’s exchange rate.
[6]
–2
Section B
–3
Answer one question.
–4
–5
2
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
(a) Explain how an equilibrium price for a product is established in the market and how it may
change.
[8]
(b) Discuss whether a firm’s revenue would increase, in response to price and income changes,
if the price elasticity and income elasticity of demand for its product became highly elastic.
[12]
F ig. 2 U S$ e x c h a n g e rate a g ain st th e e uro 1980 to 2002
1.6
1.5
1.4
euro stronger /
U S$ we aker
3
1.2
1.1
1.0
0.9
4
U S$ stronger /
euro we aker
(a) Explain, with examples, why labour productivity might vary between countries.
0.7
0.6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
The figures before 1999 are an imaginary exchange rate based on the values of the main
European currencies, as the euro was officially introduced only after 1999.
There is a two-way link between a country’s trade performance and its exchange rate. A change
in the trade performance can affect the exchange rate while a change in the exchange rate can
affect the trade performance.
9708/02/O/N/07
[8]
(b) Unemployment can be measured by the claimant count or the labour force survey. Discuss
the relative reliability of these two measures.
[12]
0.8
© UCLES 2007
[8]
(b) Discuss, with the aid of a demand and supply diagram, the effects on consumers and
producers when the government introduces an indirect tax on a good.
[12]
1.3
U S$ /
euro
(a) Explain how resources are allocated in a market economy.
© UCLES 2007
9708/02/O/N/07
4
2
Section A
Answer this question.
1
The appreciation of the Zambian Kwacha
Zambia’s currency, the Kwacha, experienced a significant appreciation in the year up to March 2006.
This is shown in Fig.1. Factors that influenced the exchange rate at this time were an improvement in
Zambia’s export performance, a reduction in the foreign debt owed by Zambia, an increase in foreign
aid received by Zambia and an inflow of foreign investment. The exchange rate is vitally important for
Zambia because its exports of copper, tobacco, maize and cotton are priced in US$ but its costs are
paid in Zambian Kwacha.
Fig.1 Zambian exchange rate (Kwacha per US$), April 2005 to March 2006
4800
4600
4400
4200
Kwacha
per U S$ 4000
3800
3600
3400
3200
3000
Apr May Jun
05 05 05
Jul
05
Aug S ep O ct Nov D ec Jan F eb Mar
05 05 05 05 05 06 06 06
(a) Identify from Fig.1 the greatest monthly appreciation of the Kwacha.
(i) In which month did this take place?
[1]
(ii) By how much did it appreciate?
[1]
(b) Explain what Fig.1 suggests about the type of exchange rate system used by Zambia.
[3]
(c) Explain how the change in the value of the Kwacha between September 2005 and
January 2006 might have been influenced by
(i) the improved export performance and
(ii) the reduction in foreign debt.
[6]
(d) How would the appreciation of the Kwacha affect Zambia’s terms of trade?
[3]
(e) Discuss whether an appreciation of its exchange rate always benefits a country.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2008
9708/02/M/J/08
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
4
2
Section A
Answer this question.
1
Tyre problems for the mining industry
In 2005, large-scale economic growth in China had increased the demand for minerals to record
levels. As a result, 2005 was a boom year for mining worldwide, and output expanded rapidly.
The huge earth-moving trucks used in mining need massive off-the-road (OTR) tyres. These tyres
cost $20 000 each and take a day to manufacture. By 2006, a major tyre producer, Bridgestone,
estimated that mining companies required 50% more OTR tyres than in the previous year, but the tyre
producers struggled to meet this demand from the mining companies. Tyre producers’ stocks of tyres
were very low, while fixed production capacity meant that output had remained steady since 1999. It
was not technically possible to switch from car tyre production to making OTR tyres.
Total planned production for all of 2006 had already been sold and no new factories were due to start
producing before the end of 2007. Another tyre producer, Michelin, intended to spend $85m on its
factory in the US, and Bridgestone intended to raise its factory capacity in Japan in 2008.
Rio Tinto, one of the world’s largest mining companies, usually spent $100m on 5000 tyres each year,
but instead faced the prospect of having to stop trucks working while they had expensive tyre checks
and tyre repairs. The company predicted that this would limit future exploration for new sources of
minerals and cause a rise in mineral prices.
(a) Why can the demand for OTR tyres be described as a derived demand?
[2]
(b) Explain why the supply of OTR tyres was highly inelastic in 2006.
[4]
(c) Analyse, with a demand and supply diagram, the change in the market for OTR tyres during
2006.
[5]
(d) How might a shortage of OTR tyres affect the productivity of mining companies?
[3]
(e) Discuss whether the shortage of OTR tyres required government intervention.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2008
9708/02/O/N/08
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
4
2
Section A
Answer this question.
1
The importance of copper production in Chile
Chile is a major producer and exporter of copper. For Chile, copper is a vital export and makes a
major contribution to its trade. The Central Bank of Chile forecast a visible trade surplus of
US$17 billion for 2006, two thirds higher than in 2005. Changes in world copper prices in 2006, a
year of global growth, were an important influence on Chile’s trade performance. However, one
problem that Chile faced in 2006 was a strike for higher wages and better conditions at
Escondida, the world’s largest copper mine, where 8 % of world copper was mined.
Figure 1 shows the contribution of copper to Chile’s export revenue and changes in world copper
prices.
Fig. 1: Chile’s export revenue and world copper prices, 2000-2006
exports
copper price
U S$ billion
U S$ thousand per tonne
50
10
40
8
30
6
20
4
10
2
0
2000 2001 2002 2003 2004 2005 2006
key
non-copper exports
copper exports
copper price
0
ye ar
(a) (i) Compare the price of copper in the middle of 2003 and the middle of 2006.
[2]
(ii) Explain one change in demand and one change in supply that might have caused this
movement in the price of copper.
[4]
(b) (i) Calculate Chile’s approximate visible trade balance in 2005.
[2]
(ii) What information in addition to that in Fig. 1 would be required to calculate Chile’s
current account balance in 2006?
[4]
(c)
(i) How did the importance of copper as part of Chile’s exports change between 2002 and
2005?
[2]
(ii) Discuss whether it is desirable for a country to specialise in the production and export of
a single good.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2009
9708/21/M/J/09
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
4
2
Section A
Answer this question.
1
Elasticity of demand for air travel
The Department of Finance of Canada examined 21 studies of elasticity of demand for air travel.
These were mainly based on behaviour in the USA. It produced a summary of what it thought
were the most accurate estimates of elasticity for different segments of the market. Some of
these findings are given in Fig.1 and Fig. 2.
Fig.1 Income elasticity of demand (YED) for air travel
YED
value
+1.1
Total market
Fig. 2 Price elasticity of demand (PED) for air travel
market segment
Long-distance international business flights
Long-distance international leisure flights
Short-distance business flights
Short-distance leisure flights
PED
value
-0.3
-1.0
-0.7
-1.5
(a) (i) State the formula used to calculate income elasticity of demand.
(ii) What can be concluded about air travel from Fig. 1?
[2]
[2]
(b) Using Fig. 2, explain a likely reason for the different price elasticity values for
(i) business flights compared with leisure flights
[3]
(ii) long-distance flights compared with short-distance flights.
[3]
(c) Explain the significance of the price elasticity values in Fig. 2 for an airline considering a
policy of fare cutting.
[4]
(d) Discuss the costs and benefits of an increased demand for air travel.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2009
9708/21/O/N/09
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i) What is meant by nominal prices and real prices?
Answer this question.
1
[2]
(ii) Compare what happened to nominal food prices and real food prices before and after
the year 2000.
[3]
World Food Prices
(b) (i) How might the differences in food weights shown in Table 1 be explained?
Between 1975 and 2007 the trend in world food prices changed significantly. Fig.1 shows indices
of nominal and real food prices as measured by the International Monetary Fund (IMF).
[3]
(ii) Contrast the effect on the rate of inflation in Kenya and in the UK if there were a 20%
rise in food prices in each country.
[2]
Fig. 1 IMF World Food Prices Indices 1975-2007 (2000=100)
300
re al prices
(c) Explain one possible reason for the responsiveness of world food supply to changes in price
reported by the IFPRI.
[4]
200
100
(d) Discuss the benefits and drawbacks of rising world food prices.
nominal prices
0
1975
Section B
Answer one question.
1980
1985
1990
1995
2000
2007
2
The importance of food within consumer spending patterns varies between countries. This is
reflected in the weight given to food within a country’s consumer prices index (CPI). Table 1
shows the CPI food weight for selected countries.
Country
Weight given to food
in CPI (%)
UK
10
Australia
15
China
34
Kenya
50
Bangladesh
65
The International Food Policy Research Institute (IFPRI) calculated that a 10% rise in world food
prices results in a 1% to 2% increase in world food supply. The effects of higher world food prices
can benefit some countries and individuals but harm others.
9708/22/O/N/09
(a) With the aid of a diagram, explain how a government subsidy to producers of fuel will affect
the producers and government expenditure.
[8]
(b) Discuss how reduced air fares on low-cost budget airlines might affect the air travel market
and the markets for related goods and services.
[12]
Table 1: Weight given to food (%) in CPI for selected countries
© UCLES 2009
[6]
3
(a) Explain why a lighthouse is often given as an example of a public good while a light bulb is
not.
[8]
(b) Discuss whether it is likely that the private costs and the social costs of production would be
identical.
[12]
4
(a) Compare the aims and features of a free trade area with those of an economic union.
[8]
(b) Discuss whether an improvement in a country’s terms of trade always works to its benefit.
[12]
© UCLES 2009
9708/22/O/N/09
2
3
Section A
(a) How far does the data in Fig. 1 confirm that the normal demand curve relationship exists
between the price and the quantity demanded of cigarettes?
[3]
Answer this question.
1
(b) (i)
Economic Aspects of Cigarette Smoking
(ii)
What do the three elasticity values in Table 1 tell us about the elasticity of demand for
cigarettes?
[3]
What might explain these different elasticity values?
[4]
Smoking cigarettes is a controversial matter that illustrates a number of economic issues. As with
most products, the key influence on the level of consumption is the product’s price.
(c) Explain two possible economic reasons why cigarettes are heavily taxed.
[4]
United States
(d) Discuss the possible economic consequences of making cigarette smoking illegal.
[6]
Fig. 1 US cigarette consumption and cigarette prices 1970–2006
cigarette consumption
(billions of packs)
average retail price per pack
(dollars)
$4.25
35
$3.75
30
$3.25
billions
25
of packs
$2.75
price
(dollars)
$2.25
20
$1.75
15
06
04
20
02
20
00
20
20
96
98
19
94
19
92
19
90
19
88
19
86
19
19
82
84
19
80
19
78
19
76
19
74
19
72
19
19
19
70
$1.25
Malaysia
A study of cigarette smoking in Malaysia estimated the short-run and long-run price elasticity of
demand (PED) and the income elasticity of demand (YED) for cigarettes between 1990 and 2004.
The results are shown in Table 1.
Table 1: Demand elasticities for cigarettes in Malaysia
Short-run PED
Long-run PED
YED
– 0.08
– 0.57
+1.46
Europe
In Europe, taxation of cigarettes is particularly heavy. In 2006 it was 76.4% of the final selling price
in Germany, 77.1% in the UK and 80.4% in France. European countries are increasingly banning
smoking in enclosed public areas and workplaces. Some anti-smoking campaigners are calling for
the smoking of cigarettes anywhere to be made illegal.
© UCLES 2010
9708/21/M/J/10
© UCLES 2010
9708/21/M/J/10
[Turn over
2
3
Section A
1
(a) (i)
Answer this question.
(ii)
Inflation in Paraguay
(b) (i)
Paraguay is a small South American country with few of the advantages that bigger, better known
economies such as Venezuela and Brazil enjoy.
In January 2008 Paraguay updated its Consumer Price Index (CPI) with new weights based on
the latest household budget survey. Table 1 shows the changes in the weights.
Why are weights used in constructing a CPI?
[2]
Explain possible reasons why the weights for alcohol and tobacco and transport changed
between 1992 and 2008.
[4]
What is meant by inflation?
[2]
(ii)
Using Fig. 1 compare Paraguay’s inflation between 1950 and 2005 with that of Venezuela.
[2]
(iii)
To what extent did Paraguay achieve a low and stable rate of inflation between 1950 and
2005?
[4]
(c) Discuss whether all countries should set annual inflation targets of around 3%.
[6]
Table 1 Weights in the Paraguayan CPI, 1992 and 2008
1992
2008
35.1
32.1
Clothing
8.6
4.9
Alcohol and tobacco
2.1
1.2
Furniture
8.0
7.7
Transport
7.4
14.8
Communication
0.7
3.4
Food
Housing
10.4
8.9
Health
4.8
4.1
Entertainment
5.1
6.1
Education
2.7
4.0
Restaurants and hotels
4.8
5.5
10.3
7.3
Miscellaneous goods and services
Paraguay’s performance and that of Venezuela in controlling inflation are shown in Fig. 1.
Section B
Answer one question.
2
(a) Explain how a country’s production possibility curve depends upon its factors of production.
[8]
(b) Discuss how well comparative advantage explains the pattern of international trade.
3
(a) With the help of a diagram, explain why some goods are produced in quantities greater than
is socially desirable.
[8]
(b) Discuss whether national defence or a public park is the better example of a public good.
[12]
4
(a) Using a normal demand curve, explain how consumer surplus occurs.
100
Key:
Venezuela
Paraguay
inflation 80
rate
60
%
40
20
0
50 55 60 65 70 75 80 85 90 95 00 05
© UCLES 2010
9708/22/M/J/10
[8]
(b) With the help of diagrams, discuss whether consumers will benefit from the introduction on a
product of (i) an indirect tax, and (ii) an effective maximum price.
[12]
Fig. 1 Inflation in Paraguay and Venezuela 1950–2005
120
[12]
© UCLES 2010
9708/22/M/J/10
2
3
Section A
(a) (i)
(ii)
Answer this question.
1
Summarise the main changes in bicycle production shown in Table 1.
[2]
How might the changing pattern of production be explained?
[3]
(b) Explain the likely effects for Chinese bicycle manufacturers of the anti-dumping import duty
introduced by the EU.
[3]
Chinese Bicycles
(c) (i)
China is famous for its bicycles. There has even been a song written about those in Beijing.
China is the world’s leading producer and exporter of bicycles. Table 1 gives its output for two
years compared with other leading producers.
(ii)
Table 1 Bicycle production (millions), selected producers
Use Fig.1 to compare the trend in the world production of bicycles with that of cars.
(d) Discuss the externalities that might arise from the use of bicycles and cars.
Year
China
Italy
Taiwan
Japan
US
1997
30.0
4.0
11.9
1.8
6.0
2007
87.0
2.5
4.9
1.1
0.3
In 2007, China exported 59 million bicycles, of which 17.3 million went to the US and 9.7 million
to Japan. The European Union (EU) imported only 0.8 million, mainly because of a 48.5%
anti-dumping import duty on Chinese bicycles. Taiwan, China’s major competitor, concentrates on
more expensive, higher quality products, and exported 4.7 million bicycles.
[2]
How might the change in Chinese ownership of bicycles and cars between 1995 and
2005 be explained?
[4]
[6]
Section B
Answer one question.
2
Fig. 1 shows the world output of bicycles and cars.
(a) With the help of examples, explain why different economic decision makers face the problem
of scarcity.
[8]
(b) Discuss why the mixed economy is the most common economic system.
[12]
Fig. 1 World bicycle and car production, 1950 to 2007
3
140
120
bicycles
(b) Discuss whether inflation is more likely to be caused by domestic or international influences.
[12]
100
million
(a) Explain why unanticipated inflation is often considered more of a problem than anticipated
inflation.
[8]
80
4
60
cars
40
(b) There are various influences on the international value of a currency in a floating exchange
rate system. Discuss their relative importance in different economies.
[12]
20
0
1950
(a) Explain the relevance of the Marshall-Lerner condition and the J-curve effect to the success
of a currency devaluation.
[8]
1960
1970
1980
1990
2000
2010
In 2007 domestic sales of Chinese bicycles fell 3.8% to 28 million. Between 1995 and 2005 the
number of bicycles owned in China fell from 670 million to 435 million, while car ownership rose
from 4.2 million to 8.9 million.
© UCLES 2010
9708/23/M/J/10
© UCLES 2010
9708/23/M/J/10
4
2
Section A
Answer this question.
1
The Current Account of Swaziland’s Balance of Payments
Swaziland is a small, landlocked economy in southern Africa. The Swazi currency is the lilangeni
(plural emalangeni) and the currency is pegged to the South African rand at a fixed rate of one to
one. The country has faced changing international conditions in recent years, as is shown in its
current account statistics.
Table 1 Swaziland’s current account components, selected years, millions emalangeni
2003
Balance on goods
2005
2007
957.9
–1641.3
–1910.1
–1090.2
–765.0
–367.6
Net income
–317.4
1133.8
449.3
Net current transfers
1136.4
619.8
1366.6
Balance on services
The Central Bank of Swaziland’s report on the 2007 export performance identified the following.
•
•
•
Exports grew by 8.4% with a positive performance by some manufacturing companies.
Successful exports included sugar, sugar-based products, soft drink concentrates, wood
pulp and timber products, textiles and garments, citrus and canned fruits and meat
products.
Global demand and rising export prices led to increased export revenue.
Export performance was helped by the depreciation of the domestic currency against the US$ and
the currencies of other trading partners outside of the Southern African Customs Union (SACU)
and Common Monetary Area (CMA), of which Swaziland is a member. In addition, exports of
meat and meat products to the European Union (EU) resumed in 2007 after the EU lifted its ban
on Swaziland’s beef exports. This ban was originally imposed because of Swaziland’s failure to
comply with the required quality standards.
(a) In Swaziland’s current account between 2003 and 2007,
(i)
which component showed a continuous improvement, and
(ii)
which component showed a continuous worsening?
[2]
(b) How did the current account balance change between 2003 and 2007?
[3]
(c) (i)
[2]
(ii)
What is comparative advantage?
In the light of the Central Bank of Swaziland’s report what might be concluded about the
nature of Swaziland’s comparative advantage and the factors on which it is based? [4]
(d) Explain the conditions necessary for the depreciation of a country’s currency to increase its
export revenue.
[3]
(e) Discuss the case for and against the use of tariffs by Swaziland to retaliate when the EU
banned imports of Swaziland’s beef.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2010
9708/21/O/N/10
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
Answer this question.
1
Problems for Dairy Farmers in the United States
Milk is used to make a range of products, including butter, cheese and ice cream, as well as
serving as a drink. This was of no help to US dairy farmers in 2009 when they faced a falling
price for their milk. Fig. 1 shows the extent of the price change in recent years. While consumers
purchase milk by volume (litres), farmers are paid by weight (kilograms).
Compare the average milk price paid to farmers in the US in August 2008 with that in
August 2009.
[2]
(ii)
How far does Fig. 1 suggest that the price of milk is subject to regular seasonal influences?
[2]
(b) (i)
Compare the changes in milk prices in the US and in New Zealand between 2007 and
2009.
[2]
(ii)
Explain two possible reasons for the different level of milk prices in the US and
New Zealand.
[4]
(c) Explain how one group, other than dairy farmers, would lose from lower milk prices and how
another group would gain from lower milk prices.
[4]
Fig. 1: Average milk price paid to farmers in the US, Jan 2007 to August 2009
Price in euros (€) per 100 kg
(a) (i)
40
(d) Discuss the case for the use of government subsidies for the production of milk.
35
30
Section B
2008
25
Answer one question.
20
2009
15
Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
2
(a) Explain the functions of an economic system.
Table 1: Average annual milk price (€ per 100 kg) in the US and New Zealand, 2007–2009
2007
2008
2009
US
30.69
27.49
19.30
New Zealand
22.48
25.17
16.21
US farmers blamed their problems on the global recession, the strength of the US$ and high
cattle feed prices. At the same time, New Zealand and Australia increased their exports and the
European Union (EU) reintroduced its export subsidies on milk products.
3
(a) Explain how the effects of a devaluation on the level of economic activity differ from those of a
deflation.
[8]
(b) Discuss whether inflation can be both the cause and the result of fluctuations in an economy’s
exchange rate.
[12]
4
(a) Explain how the different international transactions of a country are recorded in its balance of
payments account.
[8]
(b) Discuss the use of tariffs and quotas as policies to reduce a current account deficit.
The world milk industry has often had support from governments that have paid subsidies to
farmers and supplied free milk to young children. US farmers were hoping for extra government
intervention.
9708/21/M/J/11
[8]
(b) Discuss possible reasons why mixed economic systems have replaced most of the former
planned economic systems.
[12]
A price fall was also experienced by New Zealand as shown in Table 1.
© UCLES 2011
[6]
2007
© UCLES 2011
9708/21/M/J/11
[12]
4
2
Section A
Answer this question.
1
Australia and its Northern Territory
The Northern Territory of Australia is a large, sparsely populated area. It relies heavily on tourism,
mining, agriculture and fishing. The extraction of oil and gas and the mining of iron ore and bauxite
have grown significantly in recent years. Its manufacturing is principally based on the processing
of its natural resources.
The Northern Territory government publishes forecasts, which compare the economic prospects
of the Northern Territory with those of Australia as a whole. The table below gives extracts from the
forecasts in January 2009.
Table 1: Selected economic forecasts for Northern Territory and Australia
Northern Territory
Australia
2008–9
2012–13
2008–9
2012–13
International exports,
constant price (A$*m)
4172
6004
176 010
236 824
International imports,
constant price (A$m)
2718
2811
217 675
224 521
Consumer price index,
1989–90 = 100
164.6
180.0
167.7
186.4
Average weekly
nominal earnings, A$
954
1078
916
1050
Unemployment rate (%)
3.7
5.7
4.2
6.5
Population aged 15–64
(thousands)
170
186
17 456
18 627
* A$ = Australian dollars
(a) (i)
(ii)
Calculate and compare the change in the trade balance between 2008–9 and 2012–13
of the Northern Territory with that of Australia.
[4]
Explain why exports and imports are often measured at constant prices.
[2]
(b) Explain two additional pieces of information that would be useful in judging Australia’s
international financial position.
[4]
(c) Analyse the change in average weekly earnings in Australia in real terms between 2008–9
and 2012–13.
[4]
(d) With the help of the text and the table, discuss the economic outlook for the Northern Territory.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2011
9708/22/M/J/11
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) Compare the exchange rate of the S$ against the US$ from the beginning of 1980 to the
beginning of 2010.
[2]
Answer this question.
1
(b) Analyse the possible changes in the demand for and the supply of the S$ that could account
for the trends in its exchange rate between 1997 and 2007.
[4]
The Singapore Exchange Rate
(c) Explain two ways in which an appreciating exchange rate can help to reduce inflation.
Singapore is a relatively small, open economy which relies heavily on international trade. The
values of both its exports and imports are more than 100% of its GDP. Its largest trading partners
are Malaysia, China and the US. In the second half of 2008 its economy faced a sharp downturn,
with a large fall in its exports that affected the Singapore exchange rate.
[4]
(d) Using the extract, consider whether Singapore has both a floating and a fixed exchange rate
system.
[4]
(e) Discuss whether an economy will benefit from a fall in its exchange rate.
[6]
Fig. 1 shows the exchange rate of the Singapore dollar (S$) in terms of the US dollar (US$)
between 1980 and 2010.
Fig. 1: The Singapore Exchange Rate 1980–2010
Section B
0.750
Answer one question.
0.725
Singapore dollar (in US$)
0.700
0.675
2
0.650
(a) Explain how resources are allocated in a free market economy.
[8]
(b) Discuss how the market system might be influenced by government intervention to provide
appropriate quantities of goods and services.
[12]
0.625
0.600
0.575
3
0.550
0.525
(b) Discuss whether the payment of government subsidies to farmers is a beneficial policy. [12]
0.500
0.475
4
0.450
0.425
1980
(a) Explain how and why the price elasticity of supply of agricultural goods differs from that of
manufactured goods.
[8]
1985
1990
1995
2000
2005
2010
(Source: Pacific Exchange Rate Service)
(a) Explain the limitations of the theory of comparative advantage in accounting for a country’s
pattern of trade.
[8]
(b) Discuss whether the introduction of trade barriers against imports can always be justified.
[12]
Singapore has a unique exchange rate system. The Monetary Authority of Singapore (MAS) uses
the exchange rate to maintain price stability and encourage economic growth.
The main features of the system are that:
1
the S$ is managed against a weighted basket of currencies of its major trading partners
and competitors,
2
the exchange rate is allowed to move within an undisclosed trading band but not to move
outside of it,
3
the trading band is reviewed typically every three months and changed if necessary.
The poor economic conditions in March 2009 caused the MAS to lower the trading band which
was the same as a depreciation of the S$.
© UCLES 2011
9708/23/M/J/11
© UCLES 2011
9708/23/M/J/11
2
3
Section A
(a) Compare the price behaviour of the three sizes of diamond between July 2004 and December
2008.
[3]
Answer this question.
(b) Explain two possible influences on the demand for diamonds.
The Diamond Market
1
[4]
(c) Show, with the help of a diagram, how the introduction of the 5% luxury tax would have
affected the supply of diamonds.
[4]
The world diamond market was badly hit by the start of the global economic slowdown in 2008.
Mines were shut in Southern Africa and Canada, diamond cutters and polishers lost their jobs
in India and retail jewellers went out of business in the US. One small piece of good news for
the diamond industry was the decision of New York’s government not to introduce a planned 5%
luxury tax on jewellery and watches priced over $20 000 in its 2009 – 2010 budget.
(d) Using an example from the data, explain the meaning of external cost.
[3]
(e) Discuss how well diamonds might serve as money if people lose confidence in paper currency.
[6]
Fig. 1 shows the monthly price indices for three sizes of diamond (0.5, 3.0 and 4.0 carats) from
October 2006 to December 2008.
Fig. 1: Diamond price indices October 2006 – December 2008
(base month for each index July 2004 = 100)
Section B
Answer one question.
350
2
Diamond price index
300
4.0 carats
(a) Explain how a government’s approach to making a decision about a construction project
might differ from that of a private firm.
[8]
(b) Discuss whether economists would classify healthcare and national defence in the same way.
[12]
250
200
3.0 carats
3
(a) Explain what determines a country’s comparative advantage in production.
(b) Discuss the effectiveness of expenditure-switching policies in reducing a current account
deficit on the balance of payments.
[12]
150
100
0.5 carats
4
(a) Explain the factors which determine the size and productivity of a country’s labour force.
[8]
(b) Discuss the problems that governments face in trying to produce accurate unemployment
statistics.
[12]
50
O
ct
06
De
c
06
Fe
b
07
Ap
r0
7
Ju
n
07
Au
g
07
O
ct
07
De
c
07
Fe
b
08
Ap
r0
8
Ju
n
08
Au
g
08
O
ct
08
De
c
08
0
Source: IDEX Online Research
Diamond mining has a controversial history. Mines are expensive to operate and have been
associated with low pay for workers and appalling working conditions. In Africa diamonds have
financed civil wars. In Canada’s North West Territories mining has been held responsible for
damage to the habitat of wildlife.
© UCLES 2011
[8]
9708/21/O/N/11
© UCLES 2011
9708/21/O/N/11
4
2
Section A
Answer this question.
The price of rice in international trade
1
Between January 2002 and July 2008 the world price of rice, a staple food for many people in
developing countries, rose by slightly over 300%. As shown in Fig. 1 the price of rice changed
very significantly in the six months to July 2008 and was influenced by the actions of different
governments.
Fig. 1: Actions of different governments and the world price of rice
Japan announces
release of rice
stocks
800
Vietnam limits
rice exports
600
India restricts
rice exports
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
200
Jul-07
400
Jun-07
US $ per metric tonne
1000
The rise in the price of rice was typical of a wide range of commodities. These price rises caused
food and fuel riots in developing countries. As a result some governments turned to protectionist
trade measures. Vietnam limited rice exports while Cambodia and Egypt banned all rice exports.
The Indian Government replaced the minimum export price that it enforced for non-basmati rice
with a complete ban on rice exports. At the same time it placed restrictions on wheat imports for
the purpose of disease control.
(a) Calculate the approximate world price of rice in January 2002.
[2]
(b) With reference to Fig. 1, analyse the different causes of the price movements of rice from
November 2007 to April 2008, and then after May 2008.
[4]
(c) Explain two possible economic reasons for India’s introduction of export restrictions.
[4]
(d) (i)
[2]
(ii)
How might an effective minimum price for exports have helped India’s position?
Why might India have changed from the use of a minimum export price to an export ban?
[2]
(e) Discuss the potentially harmful effects of India’s protectionist trade policy for both its own
economy and that of the rest of the world.
[6]
© UCLES 2011
9708/22/O/N/11
Copyright Acknowledgements:
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) Use Table 1 to identify the main changes in world potato production between 1991 and 2007.
[3]
Answer this question.
1
(b) With reference to Table 2, what might explain the different production per hectare in North
America and Africa?
[3]
The World Potato Market
(c) Explain two possible reasons for different levels of potato consumption.
2008 was the International Year of the Potato. The Swiss Government even celebrated the event by
issuing a postage stamp showing a picture of a potato.
[4]
(d) Consider the likely cross elasticity of demand between fresh potatoes and processed potatoes.
[4]
In recent years there have been considerable changes in the international market for potatoes. Table 1
shows changes in the supply of potatoes from developed and developing countries.
(e) Discuss the effect on world trade and welfare of the spread of ‘tariff escalation’.
[6]
Table 1: World potato production 1991–2007 (million tonnes)
1991
1999
2007
Developed countries
183.13
165.93
159.89
Developing countries
84.86
135.15
165.41
267.99
301.08
325.30
World total
Section B
Answer one question.
2
Different regions of the world produce and consume different quantities of potatoes as shown in
Table 2.
(a) Explain, with the help of a diagram, how an economy can in the short run and long run enjoy
consumption beyond its current production possibility curve.
[8]
(b) Discuss the effectiveness of free market economies in raising the level of welfare.
[12]
Table 2: Regional production and consumption of potatoes
Africa
Production
(tonnes per hectare, 2007)
Consumption
(kilos per head, 2005)
10.8
13.9
Asia & Oceania
15.7
23.9
Europe
17.4
87.8
Latin America
16.3
20.7
North America
41.2
60.0
3
(a) Explain the significance of a rise in the terms of trade for a country.
(b) Discuss whether government action is the most likely cause of a current account surplus on
the balance of payments.
[12]
4
(a) Explain, with the help of a diagram, the effect of a depreciation of a country’s exchange rate
on that country’s rate of inflation.
[8]
(b) Inflation affects an economy both domestically and internationally. Discuss which effect is
likely to be more significant.
[12]
The nature of the trade in potatoes has also changed as the growth of trade in processed products,
such as frozen and dehydrated potatoes, has overtaken trade in fresh potatoes. Processed potatoes
are used by fast food, snack and convenience food industries and sell at higher prices than fresh
potatoes.
Tariffs, food health standards and technical regulations are used by some countries to protect domestic
potato markets. Potatoes provide a good example of ‘tariff escalation’, where a country imposes higher
tariffs on processed products than it does on raw materials. For example the average world tariff on
fresh potatoes was 29%, while that on some processed potato products ranged from 38% to 109%.
© UCLES 2011
9708/23/O/N/11
[8]
© UCLES 2011
9708/23/O/N/11
2
3
Section A
Answer this question.
In which year was Turkey most successful in meeting its inflation target?
[1]
(ii)
In which year was Turkey least successful in meeting its inflation target?
[1]
(b) Explain the likely effect of the depreciation of the New Turkish Lira on Turkey’s rate of inflation.
[4]
Inflation Targeting
1
(a) (i)
(c) With reference to Fig. 1, how might differences between the inflation targets and actual
inflation rates in Chile and Brazil in 2008 be explained?
[4]
Many central banks use ‘inflation targeting’. Their principal aim is to achieve a particular annual
rate of inflation within an acceptable range. For example, they might aim for a 2% rate of inflation
but will accept a rate between 1% and 3%. Some economists claim that inflation targeting will
help reduce the actual rate of inflation. The Central Bank of Turkey uses this approach and Table 1
shows how well it has worked.
Table 1: Inflation in Turkey 2003–2008 (annual % rate)
2003
2004
2005
2006
2007
2008
Target rate
20
12
8
5
4
4
Actual rate
18.4
9.3
7.7
9.7
8.4
10.8
(d) How might having a target for inflation affect the causes of inflation?
[4]
(e) Discuss the possible problems of constructing an accurate consumer price index.
[6]
Section B
Answer one question.
2
In 2008 Turkey faced two particular difficulties. The New Turkish Lira (TRY) depreciated by 30%
and food prices rose because of drought. Within the Turkish Consumer Price Index, food has a
high weighting of 31%.
(a) Explain how the loss of confidence in money will affect an economy’s production possibility
curve.
[8]
(b) Discuss the difficulties involved in changing a planned economy to a successful market
economy.
[12]
How successful five countries were in controlling inflation in 2008 is shown in Fig. 1.
Fig. 1 Target and actual inflation rates in five countries, 2008
12
8
4
6
Target inflation band
4
(b) Discuss whether restrictions on international trade can ever be justified.
Turkey
Chile
Colombia
Romania
inflation target
Brazil
0
(a) Use economic analysis to explain the benefits of international trade.
upper limit
2
© UCLES 2012
(a) Explain, using elasticity of demand, the possible reasons why in some countries there has
been an increased use of private transport instead of public transport.
[8]
(b) Discuss the economic reasons for subsidising public transport and taxing private transport.
[12]
Actual inflation rate
10
Inflation
rate
(%)
3
9708/21/M/J/12
lower limit
© UCLES 2012
9708/21/M/J/12
[8]
[12]
4
2
Section A
Answer this question.
1
Current Account Balances 2006–2010
The International Monetary Fund (IMF) supplies data on the balance of payments, particularly the
current account balances, of its member countries. Table 1 was produced in October 2009 and
shows balances for 2006 to 2008 and a forecast for the balances for 2009 and 2010 of several
member countries.
Table 1: Current account balances in billions of US dollars (US$) 2006–2010
2006
2007
2008
2009
2010
Brazil
13.6
1.6
–28.2
–18.8
–33.3
China
253.3
371.8
426.1
361.5
451.2
India
–9.3
–11.3
–26.6
–27.5
–33.6
Japan
170.4
211.0
157.1
96.9
105.6
Mexico
– 4.4
–8.3
–15.7
–10.8
–12.6
Russia
94.3
77.0
102.4
45.4
62.0
–803.5
–726.6
–706.1
–369.8
–324.7
United States
The start of a worldwide recession in 2009 had a major impact upon the level of international trade
and affected different countries in different ways.
A country’s current account balance is a key macroeconomic indicator. In some countries a current
account surplus is an important economic objective. Other countries, however, need to decrease
a current account deficit. One of the possible actions by a government facing such a deficit is to
introduce an expenditure-reducing policy.
(a) Compare the changes shown in the current account balance of Russia and the United States
between 2006 and 2010.
[2]
(b) Explain two possible economic reasons why China’s international trade performance was
stronger than that of India.
[4]
(c) Explain two likely economic effects of the 2009 recession on international trade.
[4]
(d) Why might a current account surplus be an important economic objective for some countries?
[4]
(e) Discuss the desirability of using an expenditure-reducing policy to decrease a current account
deficit.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2012
9708/22/M/J/12
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i)
(ii)
Answer this question.
(b) (i)
1
Economic Integration
(ii)
Use Table 1 to compare the export performance of the three trade groups in 2003.
[2]
How might the differences you have identified be explained?
[3]
State three ways in which an economic union differs from a free trade area.
[3]
Explain two problems that might make economic integration difficult.
[4]
The world’s two best known trade groups are probably the European Union (EU) and the North
American Free Trade Area (NAFTA).
(c) Use Table 2 to show whether the free movement of capital or the free movement of skilled
workers is estimated to be more beneficial for JACIK.
[2]
In 2005, a study examined the likely impact of the proposed formation of a third major trade
group, JACIK. This would be an economic community comprising Japan, the Association of South
East Asian Nations (ASEAN), China, India, and South Korea. ASEAN is a free trade area of ten
countries including Indonesia, Malaysia and Singapore.
(d) Discuss how the rest of the world might view the formation of JACIK.
Section B
Exporting is an important activity for all three trade groups as shown in Table 1.
Answer one question.
Table 1: Exports by value and world share, 2003
EU
NAFTA
JACIK countries
Exports (US$ billions)
3523
1486
1657
% of world total
46.5
19.6
21.9
The 2005 study produced models of three levels of economic integration and the welfare gains
with each were estimated. The results are shown in Table 2.
2
Model 1:
Free trade
of goods
and services
Model 2:
Free trade of goods
and services and
free movement of
capital
Model 3:
Free trade of goods and
services and free movement of
both capital and skilled workers
107 626
111 807
150 695
13 451
13 553
19 405
China
6 327
7 100
16 328
India
6 971
7 379
9 937
South Korea
13 043
13 317
14 076
JACIK total
147 418
153 156
210 441
Rest of World total
–27 293
– 45 306
109 916
World total
120 125
107 850
320 357
ASEAN
© UCLES 2012
9708/23/M/J/12
(a) Explain whether the factors of production are always of equal economic importance within
and between economies.
[8]
(b) Discuss whether planned economies should always be replaced by free market economies.
[12]
3
Table 2: Estimated welfare gains from the formation of JACIK in US$ million
Japan
[6]
(a) Explain how income elasticity of demand and cross elasticity of demand can be used to
classify different types of goods.
[8]
(b) Discuss the effectiveness of government use of maximum and minimum prices to help
consumers and producers.
[12]
4
(a) How does aggregate demand and aggregate supply analysis explain the existence of inflation
in the short run?
[8]
(b) Discuss whether a period of inflation or a period of deflation is more economically desirable.
[12]
© UCLES 2012
9708/23/M/J/12
4
2
Section A
Answer this question.
People in Education
1
Most governments see increasing the number of their population in education as a way to raise
national productivity and prosperity in the long term.
The Organisation for Economic Co-operation and Development (OECD) has produced statistics of
those in different age groups who participate in education. Table 1 shows the percentages of two
age groups who are in education in a selection of countries. This covers both full-time and parttime students and both public and private providers.
Table 1: Educational participation rates in 1995 and 2007, selected countries
Country
Percentage of those aged
15–19 participating in education
Percentage of those aged
20–29 participating in education
1995
2007
1995
Belgium
94
94
24
2007
28
France
89
86
19
20
South Korea
75
87
15
28
United Kingdom
72
71
18
17
United States
72
80
19
23
New Zealand
68
75
17
30
Economists classify products into different groups such as private goods or public goods and merit
goods or demerit goods. Education is usually considered to be an example of a merit good.
(a) Between 1995 and 2007, which country was
(i)
the least successful in increasing its overall educational participation rate and
(ii)
the most successful in increasing its overall educational participation rate?
[2]
(b) Explain two possible economic reasons why the educational participation rate of 15–19
year-olds is higher than that of 20–29 year-olds for all countries as shown in Table 1.
[4]
(c) (i)
(ii)
What is the difference between production and productivity?
[2]
Explain how education may affect labour productivity and the production possibility curve.
[4]
(d) Why is education considered to be an example of a merit good?
[2]
(e) Discuss the extent to which the provision of education is different from the provision of national
defence.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2012
9708/21/O/N/12
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
4
2
Section A
Answer this question.
Petrol Prices and Elasticity
1
The price of petrol in the United States (US) is determined mainly by market forces but in China
the Government actively intervenes to set the petrol price. However, in 2009 it introduced a policy
by which the price of petrol in China would more closely follow the world price of crude oil. The
price of petrol in the two countries is shown in Fig. 1.
Fig. 1 The price of petrol in the US and China, US$ per litre,
January 2008–September 2009
1.2
1.0
China
0.8
0.6
United States
US$
per
litre
0.4
0.2
J F M AM J J A S O N D J F M AM J J A S
2008
0
2009
Sources: EIA; CEIC
The consumption of petrol generates considerable externalities and petrol is also a heavily taxed
product. It is often quoted as an example of a product with an inelastic price elasticity of demand
(PED). Studies in different countries have produced varied results. A South African study in 2004
gave a short-run PED of –0.21 and a long-run PED of –0.51. In 2008 an Australian study put the
short-run PED between –0.1 and –0.14 and the long-run PED between –0.2 and –0.3.
(a) (i)
Compare the price of petrol in the US and China between January 2008 and September
2009.
[2]
(ii)
How does Fig. 1 confirm that it is in China rather than in the US that the price of petrol is
set by the government?
[2]
(b) Explain how the consumption of petrol generates externalities.
[4]
(c) (i)
Identify two points about the PED of petrol on which the studies agree.
[2]
Explain why the values of the short-run and long-run PEDs for petrol are different.
[4]
(ii)
(d) Discuss the possible consequences of the Chinese price setting policy between January
2008 and September 2009.
[6]
© UCLES 2012
9708/23/O/N/12
Copyright Acknowledgements:
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a)
(b) (i)
two
(ii)
China and Rare Earth Elements (REEs)
(c)
1
(d)
Section B
one
2
(a)
(b)
Fig. 1 Global production of REEs, 1950 to 2012
3
(a)
(b)
4
(a)
(b)
4
2
Section A
Answer this question.
Palm Oil Production
1
Palm oil is used in the production of many goods, including cooking oil, margarine, ice cream,
soap, shampoo and more recently fuel for vehicles. It competes with other vegetable oils, made
from soyabeans, rapeseed, sunflowers and groundnuts. While palm oil production takes up 6%
of the land used for vegetable oil plants across the world, it produces 38% of the total output of
vegetable oil globally and accounts for 60% of world exports of vegetable oil.
Palm oil is produced from the flesh of the palm fruit and, at the same time, palm kernel oil is
produced from the kernel or seed. After the extraction of the oils the waste is turned into palm
kernel cake that is then sold for animal feed.
In Malaysia the palm oil industry employs 570 000 people of which 405 000 are engaged in
cultivation. Malaysia and Indonesia are the world’s two most important palm oil producers and
details of their production are given in Table 1.
Table 1: Palm oil production in Malaysia and Indonesia, 1995 and 2008
Malaysia
Indonesia
7 811
4 480
1995 Production (’000 tonnes)
1995 Area cultivated (’000 hectares)
2008 Production (’000 tonnes)
2008 Area cultivated (’000 hectares)
2 540
2 025
17 734
18 090
4 488
7 008
The increase in the cultivation of palm oil has been criticised on environmental grounds. There
have been accusations of deforestation, reduction of biodiversity, harm to wildlife and increasing
emissions of greenhouse gases. One response has been an organisation of growers, processors,
and food companies to encourage the production of sustainable palm oil that limits the harm to the
environment.
(a) Give two reasons why palm oil is an important product for the economy of Malaysia.
[2]
(b) Analyse, with the aid of diagrams, the impact of an increase in demand for palm oil on the
markets for palm oil and palm kernel cake.
[5]
(c) (i)
How can Table 1 be used to provide one measure of productivity in palm oil production?
[2]
(ii)
Use Table 1 to compare the productivity of palm oil production in Indonesia in 1995 and
2008.
[2]
(d) What additional information would give a better understanding of changes in productivity in
palm oil production in Indonesia?
[3]
Copyright Acknowledgements:
(e) Discuss any two policies that governments might use to prevent harm to the environment
from palm oil production.
[6]
© UCLES 2013
9708/22/M/J/13
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
Answer this question.
(a) (i)
Compare the difference between nominal and real prices of gold over the period 1970 to
2010.
[2]
(ii)
A gold trader in 2010 said that ‘the price of gold has never been higher’. Explain whether
Fig. 1 confirms this statement.
[2]
The market for gold
1
The price of gold reacts to changing economic conditions and the level of economic confidence.
Periods of economic downturn and uncertainty, such as 2008–9 and 2010, produce major changes
in the gold price. This can be seen in Fig. 1 which shows the nominal and real price of gold
between 1970 and 2010. The real prices are in terms of 1970 prices, which is the base year.
(b) Use the data to estimate the price elasticity of supply of scrap gold between 2003 and 2009
and state whether it is elastic or inelastic.
[4]
(c) (i)
Fig. 1 Nominal and real prices of gold, US$ 1970 to 2010
(ii)
[2]
Explain two possible reasons for these changes.
[4]
(d) Discuss the extent to which gold is like other consumer goods, and whether the gold market
operates like a consumer good market.
[6]
1 250
1000
Nominal Price
US$
per
ounce
750
500
Section B
Answer one question.
250
Real Price
1970 75 80 85 90 95 2000 05 10
2
0
Source: Thomson Reuters
The supply of gold is made up of newly mined gold, gold sold from the stocks held by central
banks and scrap gold, mainly from the sale of old jewellery. In 2003, 986 tonnes of scrap gold
were traded at an average price of $280 per ounce but by 2009, 1674 tonnes were traded at an
average price of $972 per ounce.
3
Mining
(a) Explain, using economic analysis, how economists decide whether goods are substitutes or
complementary goods.
[8]
(b) Explain on which goods and services the government should impose indirect taxes to ensure
that the incidence of the tax falls mainly on consumers, and discuss the extent to which
consumer surplus would be affected.
[12]
Fig. 2 shows the changes in the pattern of supply of gold between 2001 and 2009.
Fig. 2 Gold supply (’000 tonnes), 2001 to 2009
(a) With the help of a diagram, explain how a production possibility curve can illustrate the
concepts of opportunity cost and economic growth.
[8]
(b) Discuss whether free market economies or centrally planned economies are more likely to
make choices that will maximise the benefit for consumers.
[12]
Gold is demanded for its use in industrial production, in dentistry, as jewellery and as a store of
value. Gold is used as an insurance against uncertainty and traders may speculate on the price
movements of gold.
Scrap
Central bank
sales
What were the changes in the sources of supply of gold between 2001 and 2009?
4
The best way to reduce a deficit on the current account of the balance of payments is to change
the value of the deficit country’s exchange rate.
(a) Explain how a change in a country’s exchange rate might reduce a deficit on the current
account of its balance of payments.
[8]
5
(b) Discuss whether changing the exchange rate or imposing tariffs is the better way of reducing
a deficit on the current account of the balance of payments.
[12]
4
3
2
’000
tonnes
1
2001 02 03 04 05 06 07 08 09
0
Source: GFMS
© UCLES 2013
9708/23/M/J/13
© UCLES 2013
9708/23/M/J/13
4
2
Section A
Answer this question.
People in Education
1
Most governments see increasing the number of their population in education as a way to raise
national productivity and prosperity in the long term.
The Organisation for Economic Co-operation and Development (OECD) has produced statistics of
those in different age groups who participate in education. Table 1 shows the percentages of two
age groups who are in education in a selection of countries. This covers both full-time and parttime students and both public and private providers.
Table 1: Educational participation rates in 1995 and 2007, selected countries
Country
Percentage of those aged
15–19 participating in education
Percentage of those aged
20–29 participating in education
1995
2007
1995
Belgium
94
94
24
2007
28
France
89
86
19
20
South Korea
75
87
15
28
United Kingdom
72
71
18
17
United States
72
80
19
23
New Zealand
68
75
17
30
Economists classify products into different groups such as private goods or public goods and merit
goods or demerit goods. Education is usually considered to be an example of a merit good.
(a) Between 1995 and 2007, which country was
(i)
the least successful in increasing its overall educational participation rate and
(ii)
the most successful in increasing its overall educational participation rate?
[2]
(b) Explain two possible economic reasons why the educational participation rate of 15–19
year-olds is higher than that of 20–29 year-olds for all countries as shown in Table 1.
[4]
(c) (i)
(ii)
What is the difference between production and productivity?
[2]
Explain how education may affect labour productivity and the production possibility curve.
[4]
(d) Why is education considered to be an example of a merit good?
[2]
(e) Discuss the extent to which the provision of education is different from the provision of national
defence.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2012
9708/21/O/N/12
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i)
(ii)
Answer this question.
(c) (i)
When hyperinflation takes control numbers become enormous. This was Zimbabwe’s experience
in 2007 and 2008. Professor Steve H. Hanke of The Cato Institute calculated that in November
2008 Zimbabwe’s annual inflation rate reached over 89 sextillion percent. This means 89 followed
by 21 zeros.
(ii)
Daily inflation rate (%)
195
15.6 hours
Zimbabwe (November 2008)
98
24.7 hours
64.6
33.6 hours
Yugoslavia (January 1994)
Source: Cato Institute
2
Table 2: Zimbabwe’s trade statistics (US$ millions)
2007
2008
Exports of goods
1804
1651
Imports of goods
2113
2360
Current account balance
–383
[4]
In September 2011 the Kenyan government reintroduced price controls to ensure that basic
commodities were sold to the citizens at reasonable prices.
(a) With the help of a diagram(s), contrast the impact of a maximum price fixed below equilibrium
market price with one that is fixed above it.
[8]
(b) In view of the problems of allocation that might arise with effective maximum price legislation
discuss how these problems might be overcome.
[12]
3
(a) Use diagrams to explain the difference between merit goods and demerit goods.
4
(a) Explain, with the help of a diagram, how a policy of expenditure dampening in an economy
would affect aggregate demand, prices and output in that economy.
[8]
(b) Discuss whether a policy of expenditure switching is more appropriate than a policy of
expenditure dampening in an economy with a large balance of payments current account
deficit and a high rate of inflation.
[12]
–906
Source: EU statistics
© UCLES 2013
9708/22/O/N/13
[8]
(b) Discuss whether it would be better if smoking were banned completely or whether it should
be subject to an indirect tax.
[12]
The international value of the Zimbabwe dollar also changed dramatically.
The exchange rate against the US dollar went from:
US$1 = Z$10 in 1997 to US$1 = Z$13 000 000 000 000 000 in November 2008.
Zimbabwe’s trade performance changed between 2007 and 2008 as shown in Table 2.
[2]
Explain how workers and foreign investors might react to hyperinflation.
Answer one question.
Time for prices to double
Hungary (July 1946)
Account for the shopkeepers’ treatment of cheque (check) payments.
Section B
Table 1: Three famous hyperinflations
Hyperinflation
[4]
(d) Discuss whether the change in Zimbabwe’s current account is what would be expected when
a country has the highest inflation rate in the world.
[6]
There are many stories about the Zimbabwe dollar (Z$) in this period. In July 2008 an egg cost
Z$50 billion, a bottle of beer rose in price from Z$100 billion to Z$150 billion in an hour and
shopkeepers would only accept cheques (checks) if they were written to a value twice the amount
owed by the customer. Prices of goods rose to trillions and quadrillions of Zimbabwe dollars. In
six months the price of a loaf of bread rose from Z$200 000 to Z$1.6 trillion and the government
introduced the Z$100 trillion banknote.
One way to make the figures more meaningful is to quote a daily rate of inflation or the time it
takes prices to double. Table 1 gives this for three famous hyperinflations.
[2]
Describe what happened each day to the real value of money in Zimbabwe in November
2008.
[2]
(b) Explain how a government may cause hyperinflation.
Zimbabwe and Inflation
1
What is meant by hyperinflation?
© UCLES 2013
9708/22/O/N/13
4
2
Section A
Answer this question.
Tanzania and the East African Community (EAC)
1
Tanzania, Kenya and Uganda have long cooperated on economic matters as members of the East
African Community (EAC). In 2005 EAC became a customs union. EAC then became a common
market in 2010 and planned to become a monetary union in 2012.
The EAC Customs Union operates a common external tariff (CET) with a number of rates. The
tariff includes rates of 0% on raw materials, capital goods and ‘meritorious goods’ (for example
medicines); 25% on consumer goods, and higher rates on selected ‘sensitive goods’ (for example
100% on cane sugar, 75% on rice and 60% on wheat).
Officials have identified a number of problems facing the EAC Customs Union. These include the
continuation of non-tariff barriers, language barriers, illegal cross-border trade and limited staff
resources. These are thought to be reducing the effectiveness of the EAC Customs Union.
Some details of Tanzania’s trade before and after the formation of the EAC Customs Union are
given in Tables 1 and 2.
Table 1: Tanzania’s trade with its EAC partners 2003 to 2008, US$ millions
Before Customs Union
After Customs Union
2003
2004
2005
2006
2007
2008
84.5
90.1
93.3
103.9
126.5
231.5
Imports from Kenya
117.8
131.5
174.7
156.9
113.6
197.9
Exports to Uganda
48.7
55.7
48.9
44.0
46.1
53.8
8.3
7.7
6.5
5.4
6.5
Exports to Kenya
Imports from Uganda
6.4
Source: EAC
Table 2: Tanzania’s trade balances 2003 to 2008, US$ millions
Before Customs Union
Trade balance with:
EAC
Rest of world
2003
2004
After Customs Union
2005
2006
2007
2008
7.1
6.6
–39.0
–14.4
52.5
81.0
–782.6
–1044.0
–1411.2
-2207.3
–3280.8
–3632.0
Source: EAC
(a) (i)
(ii)
Give two examples of non-tariff barriers to trade.
[2]
State two changes that would have been necessary within the EAC when it moved from
being a common market to being a monetary union.
[2]
(b) Explain two possible reasons for the imposition of different CET rates by the EAC.
[4]
(c) With reference to Tables 1 and 2, analyse the impact of the creation of the EAC Customs
Union on the trade position of Tanzania.
[6]
(d) Discuss the case for expanding the EAC after 2012 to include other neighbouring countries.
[6]
© UCLES 2013
9708/23/O/N/13
Copyright Acknowledgements:
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a)
(b) (i)
two
(ii)
China and Rare Earth Elements (REEs)
(c)
1
(d)
Section B
one
2
(a)
(b)
Fig. 1 Global production of REEs, 1950 to 2012
3
(a)
(b)
4
(a)
(b)
4
2
Section A
Answer this question.
Palm Oil Production
1
Palm oil is used in the production of many goods, including cooking oil, margarine, ice cream,
soap, shampoo and more recently fuel for vehicles. It competes with other vegetable oils, made
from soyabeans, rapeseed, sunflowers and groundnuts. While palm oil production takes up 6%
of the land used for vegetable oil plants across the world, it produces 38% of the total output of
vegetable oil globally and accounts for 60% of world exports of vegetable oil.
Palm oil is produced from the flesh of the palm fruit and, at the same time, palm kernel oil is
produced from the kernel or seed. After the extraction of the oils the waste is turned into palm
kernel cake that is then sold for animal feed.
In Malaysia the palm oil industry employs 570 000 people of which 405 000 are engaged in
cultivation. Malaysia and Indonesia are the world’s two most important palm oil producers and
details of their production are given in Table 1.
Table 1: Palm oil production in Malaysia and Indonesia, 1995 and 2008
Malaysia
Indonesia
7 811
4 480
1995 Production (’000 tonnes)
1995 Area cultivated (’000 hectares)
2008 Production (’000 tonnes)
2008 Area cultivated (’000 hectares)
2 540
2 025
17 734
18 090
4 488
7 008
The increase in the cultivation of palm oil has been criticised on environmental grounds. There
have been accusations of deforestation, reduction of biodiversity, harm to wildlife and increasing
emissions of greenhouse gases. One response has been an organisation of growers, processors,
and food companies to encourage the production of sustainable palm oil that limits the harm to the
environment.
(a) Give two reasons why palm oil is an important product for the economy of Malaysia.
[2]
(b) Analyse, with the aid of diagrams, the impact of an increase in demand for palm oil on the
markets for palm oil and palm kernel cake.
[5]
(c) (i)
How can Table 1 be used to provide one measure of productivity in palm oil production?
[2]
(ii)
Use Table 1 to compare the productivity of palm oil production in Indonesia in 1995 and
2008.
[2]
(d) What additional information would give a better understanding of changes in productivity in
palm oil production in Indonesia?
[3]
Copyright Acknowledgements:
(e) Discuss any two policies that governments might use to prevent harm to the environment
from palm oil production.
[6]
© UCLES 2013
9708/22/M/J/13
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
Answer this question.
(a) (i)
Compare the difference between nominal and real prices of gold over the period 1970 to
2010.
[2]
(ii)
A gold trader in 2010 said that ‘the price of gold has never been higher’. Explain whether
Fig. 1 confirms this statement.
[2]
The market for gold
1
The price of gold reacts to changing economic conditions and the level of economic confidence.
Periods of economic downturn and uncertainty, such as 2008–9 and 2010, produce major changes
in the gold price. This can be seen in Fig. 1 which shows the nominal and real price of gold
between 1970 and 2010. The real prices are in terms of 1970 prices, which is the base year.
(b) Use the data to estimate the price elasticity of supply of scrap gold between 2003 and 2009
and state whether it is elastic or inelastic.
[4]
(c) (i)
Fig. 1 Nominal and real prices of gold, US$ 1970 to 2010
(ii)
[2]
Explain two possible reasons for these changes.
[4]
(d) Discuss the extent to which gold is like other consumer goods, and whether the gold market
operates like a consumer good market.
[6]
1 250
1000
Nominal Price
US$
per
ounce
750
500
Section B
Answer one question.
250
Real Price
1970 75 80 85 90 95 2000 05 10
2
0
Source: Thomson Reuters
The supply of gold is made up of newly mined gold, gold sold from the stocks held by central
banks and scrap gold, mainly from the sale of old jewellery. In 2003, 986 tonnes of scrap gold
were traded at an average price of $280 per ounce but by 2009, 1674 tonnes were traded at an
average price of $972 per ounce.
3
Mining
(a) Explain, using economic analysis, how economists decide whether goods are substitutes or
complementary goods.
[8]
(b) Explain on which goods and services the government should impose indirect taxes to ensure
that the incidence of the tax falls mainly on consumers, and discuss the extent to which
consumer surplus would be affected.
[12]
Fig. 2 shows the changes in the pattern of supply of gold between 2001 and 2009.
Fig. 2 Gold supply (’000 tonnes), 2001 to 2009
(a) With the help of a diagram, explain how a production possibility curve can illustrate the
concepts of opportunity cost and economic growth.
[8]
(b) Discuss whether free market economies or centrally planned economies are more likely to
make choices that will maximise the benefit for consumers.
[12]
Gold is demanded for its use in industrial production, in dentistry, as jewellery and as a store of
value. Gold is used as an insurance against uncertainty and traders may speculate on the price
movements of gold.
Scrap
Central bank
sales
What were the changes in the sources of supply of gold between 2001 and 2009?
4
The best way to reduce a deficit on the current account of the balance of payments is to change
the value of the deficit country’s exchange rate.
(a) Explain how a change in a country’s exchange rate might reduce a deficit on the current
account of its balance of payments.
[8]
5
(b) Discuss whether changing the exchange rate or imposing tariffs is the better way of reducing
a deficit on the current account of the balance of payments.
[12]
4
3
2
’000
tonnes
1
2001 02 03 04 05 06 07 08 09
0
Source: GFMS
© UCLES 2013
9708/23/M/J/13
© UCLES 2013
9708/23/M/J/13
4
2
Section A
Answer this question.
Vietnam and inflation
1
In the mid 1980s, Vietnam started the process of moving from a command economy to one in
which the market played a significant part. In September 2010 it experienced a sharp rise in
inflation that meant that the annual rate rose to 8.9%. The Government’s target rate was 8%.
Details of some of the price changes are given in Table 1.
Table 1: Inflation rate and weighting in Vietnamese CPI of selected items, 2010.
Category
Annual inflation rate (%)
Weighting in CPI (%)
Foodstuffs
10.3
24.5
Education
15.6
5.7
Housing
12.8
10.0
Telecommunication
–5.9
2.7
Transport
6.7
8.9
Source: Vietnam Government data
The Government actions in 2009 included:
•
devaluing the Vietnamese dong (VND) against the US$ by 10%
•
raising the minimum wage and state pensions by 12%
•
increasing the minimum price of exported rice
•
encouraging banks to offer cheaper credit and to lend more.
To limit inflation the Government introduced price controls. These affected state-owned enterprises,
foreign businesses and locally-owned private firms. The controls applied to ‘abnormal’ price
changes on a wide range of goods, including fertilisers, animal feeds, animal vaccines, cement,
steel, liquid petroleum gas, coal, salt, milk powder, rice and sugar.
(a) With reference to the data identify two features of a command economy in Vietnam.
[2]
(b) Explain how the actions of the Vietnamese Government in 2009 might have caused any two
different types of inflation to occur in the Vietnamese economy.
[4]
(c) Suggest two reasons why an inflation rate of 8.9% might not be a cause of concern to a
government.
[2]
(d) (i)
Compare the contribution to the change in the CPI of the changes in the price of housing
with that of education.
[2]
(ii)
Analyse two possible reasons for the Government’s selection of the items included for
price control.
[4]
(e) Discuss the desirability of a policy of widespread price controls.
[6]
Copyright Acknowledgements:
Question 1
© UCLES 2013
9708/21/O/N/13
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i)
(ii)
Answer this question.
(c) (i)
When hyperinflation takes control numbers become enormous. This was Zimbabwe’s experience
in 2007 and 2008. Professor Steve H. Hanke of The Cato Institute calculated that in November
2008 Zimbabwe’s annual inflation rate reached over 89 sextillion percent. This means 89 followed
by 21 zeros.
(ii)
Daily inflation rate (%)
195
15.6 hours
Zimbabwe (November 2008)
98
24.7 hours
64.6
33.6 hours
Yugoslavia (January 1994)
Source: Cato Institute
2
Table 2: Zimbabwe’s trade statistics (US$ millions)
2007
2008
Exports of goods
1804
1651
Imports of goods
2113
2360
Current account balance
–383
[4]
In September 2011 the Kenyan government reintroduced price controls to ensure that basic
commodities were sold to the citizens at reasonable prices.
(a) With the help of a diagram(s), contrast the impact of a maximum price fixed below equilibrium
market price with one that is fixed above it.
[8]
(b) In view of the problems of allocation that might arise with effective maximum price legislation
discuss how these problems might be overcome.
[12]
3
(a) Use diagrams to explain the difference between merit goods and demerit goods.
4
(a) Explain, with the help of a diagram, how a policy of expenditure dampening in an economy
would affect aggregate demand, prices and output in that economy.
[8]
(b) Discuss whether a policy of expenditure switching is more appropriate than a policy of
expenditure dampening in an economy with a large balance of payments current account
deficit and a high rate of inflation.
[12]
–906
Source: EU statistics
© UCLES 2013
9708/22/O/N/13
[8]
(b) Discuss whether it would be better if smoking were banned completely or whether it should
be subject to an indirect tax.
[12]
The international value of the Zimbabwe dollar also changed dramatically.
The exchange rate against the US dollar went from:
US$1 = Z$10 in 1997 to US$1 = Z$13 000 000 000 000 000 in November 2008.
Zimbabwe’s trade performance changed between 2007 and 2008 as shown in Table 2.
[2]
Explain how workers and foreign investors might react to hyperinflation.
Answer one question.
Time for prices to double
Hungary (July 1946)
Account for the shopkeepers’ treatment of cheque (check) payments.
Section B
Table 1: Three famous hyperinflations
Hyperinflation
[4]
(d) Discuss whether the change in Zimbabwe’s current account is what would be expected when
a country has the highest inflation rate in the world.
[6]
There are many stories about the Zimbabwe dollar (Z$) in this period. In July 2008 an egg cost
Z$50 billion, a bottle of beer rose in price from Z$100 billion to Z$150 billion in an hour and
shopkeepers would only accept cheques (checks) if they were written to a value twice the amount
owed by the customer. Prices of goods rose to trillions and quadrillions of Zimbabwe dollars. In
six months the price of a loaf of bread rose from Z$200 000 to Z$1.6 trillion and the government
introduced the Z$100 trillion banknote.
One way to make the figures more meaningful is to quote a daily rate of inflation or the time it
takes prices to double. Table 1 gives this for three famous hyperinflations.
[2]
Describe what happened each day to the real value of money in Zimbabwe in November
2008.
[2]
(b) Explain how a government may cause hyperinflation.
Zimbabwe and Inflation
1
What is meant by hyperinflation?
© UCLES 2013
9708/22/O/N/13
4
2
Section A
Answer this question.
Tanzania and the East African Community (EAC)
1
Tanzania, Kenya and Uganda have long cooperated on economic matters as members of the East
African Community (EAC). In 2005 EAC became a customs union. EAC then became a common
market in 2010 and planned to become a monetary union in 2012.
The EAC Customs Union operates a common external tariff (CET) with a number of rates. The
tariff includes rates of 0% on raw materials, capital goods and ‘meritorious goods’ (for example
medicines); 25% on consumer goods, and higher rates on selected ‘sensitive goods’ (for example
100% on cane sugar, 75% on rice and 60% on wheat).
Officials have identified a number of problems facing the EAC Customs Union. These include the
continuation of non-tariff barriers, language barriers, illegal cross-border trade and limited staff
resources. These are thought to be reducing the effectiveness of the EAC Customs Union.
Some details of Tanzania’s trade before and after the formation of the EAC Customs Union are
given in Tables 1 and 2.
Table 1: Tanzania’s trade with its EAC partners 2003 to 2008, US$ millions
Before Customs Union
After Customs Union
2003
2004
2005
2006
2007
2008
84.5
90.1
93.3
103.9
126.5
231.5
Imports from Kenya
117.8
131.5
174.7
156.9
113.6
197.9
Exports to Uganda
48.7
55.7
48.9
44.0
46.1
53.8
8.3
7.7
6.5
5.4
6.5
Exports to Kenya
Imports from Uganda
6.4
Source: EAC
Table 2: Tanzania’s trade balances 2003 to 2008, US$ millions
Before Customs Union
Trade balance with:
EAC
Rest of world
2003
2004
After Customs Union
2005
2006
2007
2008
7.1
6.6
–39.0
–14.4
52.5
81.0
–782.6
–1044.0
–1411.2
-2207.3
–3280.8
–3632.0
Source: EAC
(a) (i)
(ii)
Give two examples of non-tariff barriers to trade.
[2]
State two changes that would have been necessary within the EAC when it moved from
being a common market to being a monetary union.
[2]
(b) Explain two possible reasons for the imposition of different CET rates by the EAC.
[4]
(c) With reference to Tables 1 and 2, analyse the impact of the creation of the EAC Customs
Union on the trade position of Tanzania.
[6]
(d) Discuss the case for expanding the EAC after 2012 to include other neighbouring countries.
[6]
© UCLES 2013
9708/23/O/N/13
Copyright Acknowledgements:
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
9708/2/O/N/02
2
3
Section A
(a) (i)
(ii)
Answer this question.
With reference to the data explain, using supply and demand analysis, what might have
contributed to this change in India’s exchange rate.
[4]
(e) Given the changes in the exchange rate shown in Table 1 between 2010 and 2013, discuss
whether the changes in the current account balance over this period are what economic
theory predicts.
[6]
The country is running a current account deficit of more than 3% of GDP. The cause is slowing
exports as a result of weakness in India’s trading partners and higher imports, mainly purchases
of commodities and oil (India imports around 75% of its crude oil).
Section B
Answer one question.
In addition, India has a weak external position. It has around US$ 270bn in currency reserves. But
foreign debts that must be repaid in the current year are about 40–45% of this amount.
Source: Adapted from The Independent
2
Table 1: Selected Economic Indicators for India 2007–2013
(a) Explain whether you would expect the price elasticity of supply of an agricultural product,
such as rice, in a market to be elastic or inelastic.
[8]
(b) Discuss the extent to which a government can increase the supply of an agricultural product
to an economy in the short-run and in the long-run.
[12]
2007
2008
2009
2010
2011
2012*
2013*
10.0
6.9
5.9
10.1
6.8
4.9
6.0
130.7
141.7
157.1
175.9
191.5
211.1
231.5
−8.08
−30.97
−25.91
−52.22
−62.75
−74.54
−69.07
41.3
43.5
48.3
45.7
46.6
52.1
52.9
3
Inflation
2001=100
US$ billion (bn)
(a) Explain the difference between private goods and public goods, and why it is possible for a
business to make a profit in the supply of private goods but not in the supply of a public good.
[8]
(b) Discuss the view that a market economy is always preferable to a planned economy because
of the existence of the price mechanism.
[12]
% change
Current Account
Balance
[1]
(d) India’s exchange rate depreciated between 2010 and 2011.
However, there are still positives in the Indian story. There is a youthful population, a large domestic
demand and high savings. But India’s economic difficulties, including its weak international position
and inadequate infrastructure, threaten to overwhelm the country’s potential. In critical sectors
such as power, transport and utilities more investment is needed, and although its workforce is
young and growing, there is a shortage of skills.
Index
Calculate the expected rate of inflation in India between 2011 and 2013.
(c) Explain how the provision of improved transport facilities and education services might
develop the productive potential of the economy in India.
[4]
With developed economies heavily in debt, the ability of the BRICs (Brazil, Russia, India and
China) to drive the global economic engine is increasingly in doubt. China’s growth has slowed to
its lowest rate in three years. Brazil’s growth has decreased and Russia is heavily dependent on oil
and energy prices, which are falling. India’s growth has slowed but is still high by the standards of
developed countries, though well below the levels required to maintain economic momentum and
improve the living standards of its citizens.
Gross Domestic
Product
[1]
(b) With the use of a production possibility curve explain the opportunity cost to India of choosing
to produce transport facilities rather than education services.
[4]
Problems put the brakes on India’s economic growth
1
Calculate the rate of inflation in India between 2001 and 2011.
4
(a) Explain what is meant by the term ‘money’ and outline its characteristics in a modern
twenty-first century economy.
[8]
(b) Discuss whether money is able to perform all of its functions in an economy that is experiencing
a high rate of inflation.
[12]
Exchange Rate:
Indian Rupees per
US$
*Forecast
© UCLES 2014
Source: The World Bank and other international organisations
9708/21/M/J/14
© UCLES 2014
9708/21/M/J/14
2
3
Extract 2: New Zealand’s deficit above expectations
Section A
New Zealand’s annual balance of trade deficit has increased to NZ$1.4 billion in October 2012,
up from a deficit of NZ$875 million in the previous year. The total value of exports in October 2012
was 11% lower than in October the previous year. This can partially be explained by a 5.5% rise in
the exchange rate of the New Zealand dollar over that period.
Answer this question.
Trade in New Zealand
1
Extract 1: Terms of trade down again but the view is positive
New Zealand’s terms of trade declined 3.2% from June to September 2012. There was a 13%
drop in dairy prices which contributed to a 32% rise in the volumes of dairy products exported;
the net effect on the total value of dairy exports was an increase of 16%. Meat prices fell 6%, but
volumes were 15% higher, so that export receipts from the sector were 8.9% higher than June.
Source: Adapted from The New Zealand Herald 2012
Exports of transport equipment fell 7.2% in volume terms, which was likely to reflect reduced
economic activity in Australia and the United States, the key markets for New Zealand’s
manufactured exports. Demand in Australia is expected to recover in 2013, aided by interest rate
cuts and renewed economic activity in China. Furthermore, prices for many of New Zealand’s
key export commodities were showing signs of improvement, and as international inflationary
pressures remained weak, the terms of trade were expected to stabilise during 2013.
(a) (i)
Source: Adapted from The New Zealand Herald 2012
(ii)
Fig. 1 New Zealand’s Terms of Trade Index, and Indices of Export Prices
and Import Prices for Goods Traded
Quarterly
Base: June 2002 (=100)
130
Dairy products accounted for nearly half the decline in exports, down 20% on October 2011.
Imports at NZ$4.2 billion were up 1.7% on October 2011, due to higher imports of machinery and
of consumer goods.
Index
(ii)
(b) (i)
Describe the change in New Zealand’s terms of trade from June 2011 to
September 2012.
[1]
With reference to Fig. 1, account for the change that you have described.
[2]
Given the information in Extract 1, calculate the price elasticity of demand for New
Zealand meat from June to September 2012, if all other factors were equal.
[2]
Explain why receipts from meat exports rose despite the fall in the price of meat.
[2]
(c) Using the information provided in the extracts, explain why New Zealand’s terms of trade
were expected to ‘stabilise during 2013’.
[3]
(d) Use economic theory to explain why New Zealand specialises in exports of dairy products
and meat and imports machinery and consumer goods.
[4]
(e) Discuss whether the rising deficit in New Zealand’s balance of trade is what would be
expected, given the change in the terms of trade after June 2011.
[6]
120
110
100
90
80
Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept.
08
09
10
12
11
Terms of trade
export prices
import prices
Source: Statistics New Zealand
© UCLES 2014
9708/22/M/J/14
© UCLES 2014
9708/22/M/J/14
[Turn over
2
3
Section A
Table 1: The annual average price of coffee
(US cents per unit)
Answer this question.
1
The world coffee market
Extract 1: Colombia losing ground in coffee market
Until the 1980s, Colombia was the second largest coffee producer in the world. Coffee cultivation
contributed to a growth in incomes, a positive trade balance and employment. But at the end of the
1980s things started to change for the worse. Between 1989 and 2011, the country lost 7% of its share
in the world coffee market, while Brazilian coffee producers increased exports. New producers entered
the market and Colombia fell to fourth in the world in terms of the production of coffee.
Increased international competition is not the only reason that Colombian coffee producers are
suffering. The harvest in 2011 was the smallest in 30 years, mostly due to heavy rains in the main
coffee-producing regions. In addition, there are problems related to climate change, which cause
increased coffee crop diseases that result in increased costs.
Source: All rights reserved © Worldcrunch – in partnership with AMERICA ECONOMIA
Extract 2: Nepalese farmers gain from global thirst for coffee
Nepal’s hills are suitable for coffee growing and more farmers are turning to the crop, attracted by
the high export prices. There is rapidly rising demand for coffee, especially in traditional tea-drinking
countries such as China and India. Coffee growing in Nepal is booming. Total annual production is
more than 30 times the crop in the early 1990s. Every year, 16% more land is being used for coffee and
production is increasing by 20%. The industry now employs more than 25 000 people.
Coffee is one of the few industries in Nepal, other than tourism, that is thriving. Farmers are attracted to
coffee as it is more profitable to grow than traditional crops such as maize and millet.
Year
Price
2007
107.68
2008
124.25
2009
115.67
2010
147.24
2011
210.39
2012
156.34
Source: International Coffee Organisation
(a) Describe the overall trend in coffee prices between 2007 and 2012 and identify one year in
which supply was likely to have exceeded demand in the market for coffee.
[2]
(b) Explain how coffee exports and a thriving tourism sector would contribute to Nepal’s current
account in the balance of payments.
[4]
(c) With reference to Extract 2, explain how you would classify coffee using the concept of income
elasticity of demand.
[2]
(d) Using diagrams, explain how changes in demand and supply have affected the coffee market
in Colombia and in Nepal.
[6]
(e) Discuss the view that Nepal should specialise in the production of coffee and Colombia should
specialise in some other product given the changes in costs that have occurred.
[6]
Most Nepalese coffee is exported. Coffee consumption is forecast to increase globally by about 3% per
annum over the next decade, as it did over the past decade. Rising incomes, combined with advertising,
is likely to encourage coffee drinking in countries such as China and India where coffee is not part of
traditional culture.
Coffee exports are generating much-needed foreign reserves for the Nepalese government, and
income for agricultural communities. In Nepal, too, demand is growing fast.
Source: The Guardian, newspaper 2012
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Section A
(a) Compare the rate of inflation in China between 2007 and 2008 with that between 2010 and
2011.
[2]
Answer this question.
(b) Explain briefly how the foreign exchange value of a currency is determined in a free market.
[3]
United States hints again ‘China is a currency manipulator’
1
The US Treasury regularly reviews the exchange rate policies of nine economies that account for
70% of US foreign trade, with most of the focus on China, the world’s second largest economy.
The Treasury welcomed gains in the value of the Chinese yuan, but said the currency remains
‘significantly undervalued’. This undervaluation gives China a large advantage in its bilateral trade
with the US. However, the Treasury declined to accuse China of currency manipulation because it
could lead to Chinese trade sanctions against the US.
The Treasury argued that the Chinese authorities know that an appreciating currency is of overall
benefit to China, and said the yuan had gained 9.3% against the US dollar between June 2010
and November 2012. It said that when inflation was taken into account, the value of the Chinese
currency had increased 12.6% since June 2010, when the Chinese authorities agreed to allow the
yuan to be bought and sold more freely on the foreign exchange market. Nevertheless, based on
China’s huge and rising stock of foreign exchange reserves, the US Treasury said that the yuan’s
appreciation had been insufficient.
(c) The US Treasury report states that China’s strong trade surplus has led to a ‘huge and rising
stock of foreign exchange reserves’ in China.
Explain how this justifies the claim that China is manipulating the foreign exchange value of
its own currency.
[3]
(d) Explain why China’s current account surplus is expected to increase in 2013, despite the rise
in prices in China and the appreciation of the yuan.
[6]
(e) Do you agree with the view of the US Treasury that an appreciating currency is ‘of overall
benefit’ to China?
[6]
These rising reserves, together with other factors, ‘suggest that the real exchange rate of the yuan
remains significantly undervalued and further appreciation of the yuan against the dollar and other
major currencies is justified’.
Source: Straits Times, Singapore 2012
Table 1: Various economic indicators, China 2007 to 2013
2007
2008
2009
2010
2011
2012
2013*
Inflation:
average consumer price index
(1995 = 100)
227
241
239
247
261
269
277
Current account balance
$US billion
353
412
261
237
201
190
222
Exchange rate:
yuan per $US
7.61
6.95
6.83
6.77
6.46
6.33
n/a
* forecast
Source: The World Bank and other international economic organisations
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Section A
Table 1: UK average weekly alcohol consumption (units), by age: 2006–2010
Answer this question.
Age (years)
UK Government plans to increase the price of alcohol to end ‘excessive consumption’
Plans for a minimum price for alcohol of 45 pence per unit were announced by the UK Government in
an attempt to limit excessive consumption of alcohol. The Government hopes the policy, which would
raise the price of the cheapest alcoholic drinks in shops, will reduce public disorder offences and cut
the cost of alcohol-related ill health. It says that irresponsible drinking costs the UK taxpayer £21 billion
a year, with nearly a million alcohol-related crimes and 1.2 million alcohol-related hospital admissions
in 2011.
The Alcohol Health Alliance, an organisation of 32 medical, educational and counselling groups,
welcomed the proposed policy. However, its chairman called for a higher minimum price of 50 pence
per unit: ‘According to the University of Sheffield, a minimum price of 50 pence per unit would reduce
total alcohol consumption by 6.7%, reducing hospital admissions by approximately 20 000 in the first
year alone.’
A minimum price of 45 pence per unit would cost the UK taxpayer about £200 million a year in lost
revenue from taxes on alcohol.
2006
2008
2010
16–24
14.6
13.1
11.1
25–44
14.6
13.0
12.2
45–64
15.0
13.8
13.1
65 and over
Average for all age groups
8.7
8.9
8.1
13.5
12.3
11.5
Source: Office for National Statistics
1
(a) (i)
What is the overall trend in UK real expenditure on alcohol purchased in shops for
consumption off the premises between 2008 quarter 1 and 2012 quarter 2?
[1]
(ii)
Explain how a change in one demand factor might have caused the change in weekly
alcohol consumption for the ‘average for all age groups’ shown in Table 1.
[2]
(b) (i)
Identify the age group that has shown the greatest change in average weekly alcohol
consumption between 2006 and 2010.
[1]
(ii)
For the age group you have identified, explain one possible economic reason for the
change in its average weekly alcohol consumption compared with the other age groups.
[2]
Source: Adapted from The Independent, 2012
Fig. 1: Real expenditure in the UK on alcohol purchased in shops
for consumption off the premises (£ million)
(c) If the minimum price per unit were fixed at 50 pence rather than 45 pence, explain, with the
help of a diagram, how the higher price would affect the consumer surplus in this market. [4]
£ million
4400
(d) Explain, with reference to the data, how crime and hospital admissions arising from excessive
alcohol consumption contribute to social costs.
[4]
4200
(e) Discuss whether the problems associated with excessive alcohol consumption are better
dealt with through a minimum price per unit for alcohol rather than through an education
campaign.
[6]
4000
3800
3600
3400
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
Q3
Q4
2012 Q1
Q2
3200
Source: Office for National Statistics
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Section A
Table 1: Annual average price of gasoline (petrol) in US
Answer this question.
1
United States reduces dependence on foreign oil
In 2001, a United States (US) energy report warned that by 2020 the US could be importing
two-thirds of its oil. If US oil consumption continued rising and production continued falling, imports
would increase from 10 million barrels per day to about 17.5 million per day.
The forecasts were both wrong. US oil production has soared while consumption has fallen. It now
looks more likely that the US will have only limited, if any, net oil imports by the end of the decade.
China has now replaced the US as the world’s largest oil importing economy.
A new technique, known as hydraulic fracturing (fracking), has allowed access to new sources of
oil in the US. As a result, US crude oil production has risen by 50% since 2008. In addition, the US
now produces significant quantities of biofuel from corn ethanol. This is a substitute for gasoline
(petrol) obtained from crude oil and its production has increased by more than 300% in recent
years.
In addition to new US oil supplies, what has been happening to demand is just as important.
Falling enthusiasm for cars among younger Americans has reduced the country’s need for oil.
Fewer young people are learning to drive and there have been declines in vehicle ownership per
household and the total distance driven. At the same time, US cars are now more fuel-efficient.
Fig. 1: US oil consumption, production and net imports (1990–2012)
consumption
production
net imports
20
US$ per gallon
including taxes
2007
2.85
2008
3.32
2009
2.40
2010
2.84
2011
3.58
2012
3.70
2013
(March)
3.79
Source: US Energy Information Administration
(a) With reference to Fig. 1, explain the trend in US net imports of oil after 2005.
[3]
(b) (i)
With the help of a diagram(s), explain how the new sources of crude oil from hydraulic
fracturing and the ‘falling enthusiasm for cars among younger Americans’ might be
expected to cause a fall in the price of gasoline (petrol) in the US.
[4]
(ii)
Suggest and explain one factor that might have caused the price of gasoline (petrol) to
rise in the US after 2009 despite these changes.
[3]
million barrels per day
25
Year
(c) Explain the value that you would expect to find if you measured the relationship between
gasoline (petrol) and biofuel using the concept of cross elasticity of demand.
[4]
(d) Discuss how reducing dependence on foreign oil might affect aggregate demand in the US
economy and the impact of this on prices and employment in the US.
[6]
15
10
5
0
1990 1995 2000 2005 2010
Source: Adapted from the US Energy Information Administration ‘Energy Review’
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Section A
Fig. 1: A Tale of Two Countries
Answer this question.
1
Economic prospects reverse in Latin America
Gross Domestic
Product in US$
(trillion)
Over the past decade, Brazil boomed and grew rich by selling raw materials to China. Brazil’s
economy averaged 3.6% annual growth, peaking at a rate of 7.5% in 2010. Its currency, the
Brazilian Real, substantially increased in value.
By comparison, Mexico saw lower growth, partly because it was tied to a faltering United States
(US) economy. Mexico also suffered from deep problems of its own, for example, a poor education
system and a rise in violent crime, deterring tourists and investors. Mexico’s economy averaged
2.6% annual growth over the past decade, while its currency, the Mexican Peso, fell slightly in
value.
Percentage change
in how many US$
each currency buys
(%)
Source: The Wall Street Journal, September 2013
Brazil
Mexico
2005
2010
2013
100
75
Brazilian Real
50
25
From 2011, it was Brazil’s turn to struggle as China’s demand for its raw materials decreased. In
2013 alone, Brazil’s currency depreciated by more than 10%. The Brazilian Government largely
wasted the boom years, investing little in roads and other infrastructure that could have supported
its development. In addition, many households borrowed money to finance a consumer boom
including a rapid rise in imports of luxuries from the US. As a result, a significant trade deficit in
goods and services developed.
Meanwhile, the Mexican Government used the past decade to significantly strengthen its economy,
improving the education system and making its telecommunications, financial and energy sectors
more efficient. Economists now expect the country to grow more rapidly when Mexico’s biggest
trading partner, the US, recovers economically. Also, Mexico exports manufactured goods to a
growing European market. At the same time, Mexico has maintained a relatively small trade deficit
that can be financed easily by long-term foreign investment in its companies and factories.
3.0
2.5
2.0
1.5
1.0
0.5
0
2003
Mexican Peso
0
–25
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: IMF (GDP); (The Wall Street Journal) Market Data Group
(a) Use production possibility curves to compare Brazil’s economy in 2013 with its economy in
2003.
[2]
(b) (i)
Using Fig. 1, explain what has happened to the value of the Brazilian Real in 2013
compared with 2004.
[2]
(ii)
Explain one possible reason for the stability of the Mexican Peso from 2004 to 2008
shown in Fig. 1.
[2]
(iii)
With the help of diagrams, explain how the different economic experiences of Brazil and
Mexico after 2011 mentioned in the text could explain the changes in currency values
shown in Fig. 1.
[4]
(c) Explain how the approach of the Mexican Government ‘during the past decade’ is more likely
to generate an expansion of the economy than the approach of the Brazilian Government
during this period.
[4]
(d) Identify and evaluate the usefulness of any further information that might be helpful in
assessing the future prospects of the Brazilian and Mexican economies.
[6]
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Section A
Malawi targets tourism for foreign exchange says Government minister
Answer this question.
The Government says that tourism is Malawi’s next potential source of significant foreign exchange
earnings now that demand for tobacco has fallen, following the success of the anti-smoking campaign.
The Minister of Tourism and Culture stated that ‘tourism has the potential to become a multi-billion
Kwacha industry that can change the lives of many communities around the country’.
Kwacha goes down in value by 10%, but inflation drops
A Government official has attributed the fall in the value of the Kwacha, Malawi’s currency, to the
end of the tobacco-selling season and the continued imports of farming equipment as a result
of the Malawian Government’s farm subsidy programme. A market analyst has commented that
there is a need for Malawi to increase exports as a solution to the weak currency.
Source: Adapted from the Nyasa Times October 2013
(a) (i)
On a positive note, the National Statistics Institute of Malawi has announced that the inflation rate
dropped 2.7 percentage points to 25.2% in July 2013. This is still the highest rate for the whole of
the southern African region. Encouragingly, the rate of inflation is forecast to fall further to around
17% in December 2013.
(ii)
Source: Adapted from the National Statistics Institute of Malawi
Category of spending
Food and
non-alcoholic
drinks
Alcoholic
drinks and
tobacco
Recreation
and culture
Restaurants
and hotels
50.2
2.5
2.2
1.3
Weights
Why do the categories of spending have different weights in Table 1?
[2]
(b) (i)
Explain how the fact that Malawi has the highest inflation rate in the southern African
region might be expected to affect Malawi’s terms of trade.
[2]
(ii)
With the help of a diagram, explain how increasing exports could provide a solution to
Malawi’s weak currency.
[3]
(c) (i)
Draw a diagram to show the choice that Malawi faces when allocating its scarce
resources between the production of tobacco and tourism.
[2]
(ii)
Explain one difficulty that Malawi might face in reallocating resources from the production
of tobacco to tourism.
[3]
National Consumer Price Index of Malawi
Table 1: Selected CPI weights
Showing your calculation, determine the category of spending that has shown the biggest
rise in price from January to September 2013.
[2]
(d) Discuss the factors that should be considered by the Malawian Government in deciding if it
should develop its tourist industry and allow its tobacco industry to decline.
[6]
Section B
Source: Adapted from the National Statistics Institute of Malawi
Answer one question.
Table 2: Malawi selected price indices and the annual rate of inflation
2013
2
Food and
non-alcoholic
drinks
Alcoholic
drinks and
tobacco
Recreation
and culture
Restaurants
and hotels
Annual CPI
inflation rate
Jan
122.5
114.1
123.6
186.9
35.1
April
127.9
126.0
134.6
191.0
35.8
July
107.7
130.1
140.3
193.4
25.2
Sept
117.1
130.5
144.7
197.9
21.7
(b) Discuss how, during a worldwide recession when incomes in most countries are falling,
economists might use the concept of income elasticity of demand to assess the impact of this
recession.
[12]
3
(a) Explain what economists mean when they describe a good as a ‘demerit good’ and, using a
diagram, show why such goods will be overconsumed in a free market.
[8]
(b) Discuss any two policies that might be used to deal with the problems caused by the
consumption of demerit goods and consider which might be the more effective policy.
[12]
4
Source: Adapted from the National Statistics Institute of Malawi
(a) With the help of diagrams, explain how economists use the concept of income elasticity of
demand to distinguish between inferior goods and necessity goods.
[8]
(a) Define each component of aggregate demand and, using a diagram, show how a reduction in
one of these components might reduce inflationary pressure in an economy.
[8]
(b) Discuss the impact of a high rate of inflation on the consumers and producers in an economy
and assess whether consumers or producers would suffer more.
[12]
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Section A
Answer this question.
1
Increased cereal supplies push down prices and boost world trade
The Food and Agriculture Organisation’s (FAO) forecast for world cereal production in 2013 has
been adjusted upward by 8.5%, a record level of output. Early prospects for crops to be harvested
in 2014 are also favourable. Overall prospects for wheat production in the northern hemisphere
remain good. In the southern hemisphere, maize output is likely to rise in Brazil and Argentina.
The prospects for the 2014 rice crop are mixed, with Brazil expanding output, while in the rest of
South America, insufficient rainfall is limiting the supply of rice. The lack of water for irrigation is
also limiting rice output in Australia and Sri Lanka.
FAO’s forecast for world consumption of cereals in 2013 is forecast to rise by 1.7 %. This is slightly
larger than the predicted population growth. Other uses of cereals, apart from food and animal
feed, are expected to show a strong growth in 2013/14.
(a) (i)
Calculate the percentage change in the price of cereals between 2011 and January 2014.
[2]
(ii)
Explain two possible reasons why the world price of cereals and the world price of dairy
products moved in opposite directions between 2012 and January 2014.
[4]
(b) Explain how an economist would decide whether cereals and dairy products are substitutes.
[3]
(c) Use a diagram to illustrate how a subsidy will affect the price and quantity of rice produced in
India.
[3]
(d) Explain a likely opportunity cost of the Indian Government’s spending on the food subsidy. [2]
(e) Discuss whether food subsidies are likely to solve the world’s food shortages in the long run.
[6]
Source: adapted from Food and Agriculture Organisation
Table 1: selected FAO food price indices
(Base year 2002–2004 (average of prices) = 100)
The Total Food Price Index
(meat, cereals, dairy,
vegetable oils & sugar)
Cereals Price Index
(includes wheat,
rice & maize)
Dairy Product Price Index
2011
229.9
240.9
229.5
2012
213.3
236.1
193.6
2013
209.8
219.2
242.7
2014
January
203.4
188.4
267.7
Source: adapted from Food and Agriculture Organisation
India grain subsidy may only cause hunger elsewhere
India’s battle against hunger might cause problems for the world’s poorest. The Indian Government
has said that 67 % of India’s population, over 800 million people, will have the right to buy up to
5 kilogrammes (kg) of rice, wheat and other cereals from the state each month at subsidised
prices. This substantial food subsidy will worsen public finances. The total food subsidy expenditure
is estimated to be US$25 billion.
When the production of rice in India is insufficient, the subsidy may destabilise the global rice
market. India will be forced to import rice, which will lead to higher prices and rice shortages
in other importing countries such as Nigeria, Bangladesh, Indonesia and the Philippines. India’s
good intentions may just push its rice shortages on to the rest of the world.
Source: adapted from Reuters Breakingviews 2013
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Extract 3: Higher interest rates in the US cause concern in Indonesia.
Section A
1
Answer this question.
Interest rates in the US look likely to increase and this will have an impact upon several emerging
economies, including Indonesia.
The Indonesian Economy
Indonesia’s central bank has resisted increasing interest rates but is monitoring events in the US.
Inflation in Indonesia was stable at 8.4% in December 2013, but economic growth slowed to its
lowest rate in four years. In addition, Indonesia’s trade position is poor and there is a large outflow
of foreign capital.
Extract 1: Indonesian rupiah weakens to lowest level in almost four years.
In 2012, the Indonesian rupiah’s value against the United States (US) dollar fell to its lowest level
since September 2009. This caused the cost of oil imports to rise, which resulted in a deficit on
Indonesia’s current account for the first time since 1997. However, recent developments might
support the rupiah. In June, the 2013 Budget reduced fuel subsidies, which caused a price rise for
fuel of 44%. Although this will put upward pressure on inflation, it is hoped that the reduction in fuel
subsidies will have a positive impact on the Government Budget. Also, in June, Indonesia’s Central
Bank raised interest rates, which should take some pressure off the rupiah.
Source: Adapted from FocusEconomics 2013
Fig. 1: Exchange rate of the Indonesian rupiah per US dollar
13 000
12 000
Source: The Observer 2014
(a) Describe the change in the value of the Indonesian rupiah between July 2009 and July 2013
shown in Fig.1.
[2]
(b) Explain how the fall in the rupiah could cause the first current account deficit since 1997 as
stated in Extract 1.
[2]
(c) With the help of a diagram, explain how a cut in fuel subsidies would have contributed to the
rise in the price of fuel by 44%.
[4]
(d) (i)
How could a rise in interest rates in the US affect Indonesia’s balance of payments? [2]
(ii)
With the help of a diagram, explain how this rise in US interest rates would be expected
to cause a fall in the value of the Indonesian rupiah.
[4]
(e) Discuss how any two changes described in the data might be expected to affect aggregate
demand and aggregate supply in Indonesia and assess how prices and output might be
affected.
[6]
11 000
Indonesian
rupiah per
US $
10 000
9 000
8 000
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Source: Thomson Reuters
Extract 2: Indonesia bans nickel exports.
Indonesia has started 2014 with a ban on exports of nickel, which is used to make stainless steel.
Nickel prices increased as markets prepared themselves for a fall in global supply. It is hoped
that the ban would mean that multinational companies would be forced to invest in factories in
Indonesia so that the nickel is processed in Indonesia rather than just being mined and exported.
This would create jobs in Indonesia and broaden Indonesia’s manufacturing base.
Source: Sydney Morning Herald 2014
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Section A
Table 1: Canada’s current account of the balance of payments
2008–2012, C$millions
Answer this question.
1
EU agreement ‘biggest deal Canada has ever made’
Canada and the European Union (EU) signed the Comprehensive Economic and Trade Agreement
(CETA), a free trade deal that will eliminate 98% of all tariffs, and many barriers on trade, investment
and labour mobility. Canadian manufacturers, investors and service providers will have access
to the 500 million people in the EU, where the total value of production approaches 17 trillion
Canadian dollars (C$17 trillion) a year. A study estimates that the duty-free access of Canada’s
seafood, timber, manufacturing, agriculture and mineral industries to the EU will generate around
C$12 billion in the Canadian economy and create about 80 000 new Canadian jobs.
2008
2009
2010
2011
2012
Total receipts
648 105
511 855
555 594
619 460
629 007
Total payments
646 197
557 605
614 013
667 926
691 222
Table 2: Canada’s trade in goods: principal trading areas – seasonally adjusted,
current C$millions
December 2012
Tariffs on imports from Europe of clothing, cheese, wine, dairy products and many other items
would be removed. However, CETA could take two years to come into effect, as it requires the
agreement of all EU members and the approval of Canada’s provinces.
But others are optimistic about the agreement, as it will allow Canadian beef and grain to gain new
access to European markets. The vice-president of the Canadian Cattlemen’s Association is also
hopeful about the new agreement and believes that Canadian beef will be in ‘strong demand’ in
the EU. Canadian producers will be able to sell an additional 50 000 tonnes of beef.
CETA’s website claims that under the agreement ‘Canada will now be one of the few developed
countries in the world to have a guaranteed preferential access to more than 800 million consumers
in the world’s two largest economies, the EU and the United States’.
Source: CTV News 2013, with files adapted from The Canadian Press
38 619
39 722
US
28 576
30 014
EU
Canadian dairy farmers are against the agreement. They remain in favour of protection from
foreign cheese producers and claim that European cheese will be dumped in the Canadian
market. Canadian cheese producers argue that the industry is able to produce high-quality
products for Canadian consumers but now this growing industry will face direct competition from
cheaper, subsidised European cheese producers. Canadian cheese producers could indeed face
difficulties, but the Government would provide compensation to address the negative effects of the
agreement on the Canadian dairy industry.
December 2013
Total exports
3 028
2 640
Total imports
38 635
41 381
US
24 375
27 138
EU
3 257
3 385
–16
–1 659
Balance of trade in goods
(a) Compare Canada’s current account balance in 2012 with its balance in 2008.
[2]
(b) With the help of a diagram, explain how the removal of tariffs on EU goods imported into
Canada would affect their price and quantity.
[4]
(c) How would you decide whether Canada’s cheese producers should be protected from
competition from EU cheese producers?
[4]
(d) Explain, using the theory of comparative advantage, how it is possible for consumers in both
the EU and the Canadian economy to benefit from the movement towards free trade.
[4]
(e) Evaluate any further information that would help you to assess the economic impact of
Canada’s trade agreement with the EU.
[6]
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Section A
(a) How and where would revenue from tourist arrivals in Fiji be recorded in Fiji’s balance of
payments?
[2]
Answer this question.
1
(b) Use a supply and demand diagram to show how the government investment referred to in the
article affected the price of sugar produced in Fiji.
[2]
The Fiji economy: a positive outlook
Fiji is a small island country in the Pacific with a population of 860 000. In 2014 its economy was
reported to be continuing to grow steadily. It remained on course for a fifth consecutive year of
expansion, boosted by high tourist arrivals and visible export earnings, particularly from sugar.
The factors that were expected to restrict growth in 2015 included ongoing dry weather conditions
causing lower output of agricultural goods, with the exception of sugar.
Table 1: Selected economic indicators for Fiji
(c) Explain what the changes in sugar’s contribution to visible export earnings and in the price of
sugar might suggest about the price elasticity of demand for sugar.
[3]
(d) Using aggregate demand and aggregate supply analysis, explain why inflationary pressures
remained subdued in Fiji despite higher growth.
[3]
(e) Explain how increased investment could address supply-side capacity constraints in the Fiji
economy.
[4]
(f)
Economic growth rate %
2014
estimate
2015
forecast
3.3
3.0
Inflation rate %
3.0
3.5
Current account balance as % share
of GDP
–6.0
–7.0
Discuss any economic factors that might help to explain the changes in visitor arrivals to Fiji
from Australia and Japan.
[6]
Source: Asian Development Bank, 2014
Consumption remained strong in the first five months of 2014, and imports of consumer
goods, mainly vehicles, rose by 15.6%. Personal remittances increased, boosting consumption
expenditure.
The tourism sector – Fiji’s main source of foreign exchange – continued to perform strongly. Visitor
arrivals increased by 4.0% year-on-year, with 4.6% more visitors from Australia and 11.6% more
from New Zealand, but there was a significant fall in visitor arrivals from Japan.
Sugar production increased, aided by government investments in new technology that improved
efficiency of production and reduced price.
Despite higher growth, inflationary pressures were eased by declining international commodity
prices. However, annual average inflation in 2014 was not expected to fall below 3.0%, as
economic activity was expected to revive. In addition, continuing dry weather was affecting the
food supply.
Despite the positive growth outlook, increased investment is needed to improve productivity and
address supply-side capacity constraints.
Source: Asian Development Outlook 2014 Update
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Section A
Table 1: Turkey’s balance of payments current account, 2012–2013 (US$ million)
Answer this question.
2012
2013
Exports of goods
163 221
163 371
In a press statement in 2014, Turkey’s minister in charge of the economy, Ali Babacan, introduced
Turkey’s medium-term programme (MTP) for the period 2015–2017. He stated that the first priority
of the MTP is solving the problem of inflation, second is the current account deficit and third is
structural reforms.
Imports of goods
–228 552
–243 394
Services
22 562
23 131
Tight fiscal policy will be pursued in order to reach Turkey’s goals of lower inflation and a reduced
current account deficit. Structural reforms are important to increase Turkey’s potential growth, the
minister said.
Income
–7 161
–9 355
1 433
1 181
1
Turkey’s economic policies
Extract 1: Turkey’s medium-term programme
Current transfers
He announced that the inflation rate is expected to fall from 9.4% in 2014 to 6.3% in 2015 and
5.0% by 2017. The minister also stated that the unemployment rate is expected to drop from 9.6%
in 2014 to 9.1% by 2017.
As the United States (US) economy recovers, the US central bank is expected to increase interest
rates, causing the US dollar to continue to rise. The outcome of these policies might be harmful for
Turkey’s economy.
The minister claimed that Turkey’s macroeconomic policies were already increasing saving in the
economy and reducing consumer credit. By 2017 domestic savings are expected to rise to 15% of
national income.
12
9.38
9.66
8.39
annual rate
7.75 7.89
8
of change of
consumer prices
7.31 7.03 7.29
(%)
6
6.13
(a) What happened to the balance on Turkey’s current account between 2012 and 2013?
[2]
(b) Use a production possibility curve diagram to show the intended outcome of the structural
reforms in Turkey.
[2]
(c) With the help of a demand and supply diagram, show how the expected change in US interest
rates was likely to cause the US dollar ‘to continue to rise’.
[2]
(d) Consider whether the outcome of the interest rate changes in the US was likely to be ‘harmful
for Turkey’s economy’.
[4]
Fig. 1: Turkey’s consumer price inflation rate, January 2013–September 2014
10
Source: www.turkstat.gov.tr
(e) Explain two factors that determine how the increase in consumer prices between 2013 and
2014 shown in Fig. 1 might affect the total value of Turkey’s exports.
[4]
9.54
9.16 9.32
8.30
8.88
2014
8.86
2013
8.17 7.88
7.71
(f)
Discuss how ‘tight fiscal policy’ could be expected to help Turkey achieve the first priority of
the MTP, and consider how effective this is likely to be.
[6]
7.32 7.40
6.51
4
2
0
Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
months
Source: Daily Sabah, 8 October 2014
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3
Section A
Table 1: Australia’s terms of trade, July 2011 – July 2014
Answer this question.
Year
China’s economy and Australia’s trade
2011 qtr* 3
106.5
qtr 4
102.0
2012 qtr 1
96.8
qtr 2
96.3
qtr 3
91.1
qtr 4
88.5
Extract 1: China’s record trade surplus is bad news for Australian miners
China had an overall trade surplus of almost US$50 billion in August 2014, a record balance.
However, that is bad news for countries such as Australia, which exports large amounts of raw
materials and whose biggest trading partner is China. China’s surplus came not only from a 9.4%
annual rise in exports, but also from a 2.4% fall in its imports. This has created a problem for
Australia’s balance of payments.
Terms of Trade Index
Of particular relevance to Australia, the fall in China’s imports was a cause of a steep decline
in iron ore prices, with the price hitting a five-year low of US$83.60 a tonne. Australia’s iron ore
exports dropped 9.3% in August compared with July. There was also an 18.1% slump in China’s
imports of coal between July and August.
2013 qtr 1
91.3
qtr 2
90.4
qtr 3
87.5
Meanwhile, a construction industry slowdown in China is starting to reduce demand for building
materials such as steel, and this is reducing the demand for iron ore and hence its price. It is
not expected that the situation will change soon, but some analysts are hopeful that China will
introduce some stimulus to maintain growth near its 7.5% target.
qtr 4
88.2
(a) (i)
Calculate the approximate change in Australia’s trade balance between August 2010 and
August 2014.
[2]
(ii)
Use a supply and demand diagram to show how the trend in Australia’s trade balance
over this period would be expected to influence the value of Australia’s exchange rate.
[2]
(iii)
What other information would be required to measure the change in Australia’s current
account on the balance of payments over this period?
[2]
(b) Suggest a change in the prices of exports and imports that might account for the change in
the Australian terms of trade between 2011 quarter 3 and 2014 quarter 2.
[2]
(c) Explain who in China would lose and who in China would benefit if China’s exchange rate
were allowed to rise.
[6]
Au
g1
N 0
ov
-1
Fe 0
b1
M 1
ay
-1
Au 1
g1
N 1
ov
-1
Fe 1
b1
M 2
ay
-1
Au 2
g1
N 2
ov
-1
Fe 2
b1
M 3
ay
-1
Au 3
g1
N 3
ov
-1
Fe 3
b1
M 4
ay
-1
Au 4
g14
A$million
83.4
Source: Australian Bureau of Statistics
Fig. 1: Australia’s trade balance, August 2010 – August 2014
3000
2000
1000
0
–1000
–2000
–3000
–4000
87.0
qtr 2
*quarter
This represents an interesting dilemma for China’s policymakers: the situation calls for more
expansionary policies, for example lower interest rates, but, at the same time, strong exports and
a record current account surplus will put pressure on policymakers to let the currency rise.
Trade balance
seasonally-adjusted & trend, Australian dollars (A$) million
2014 qtr 1
(d) Discuss whether lower interest rates in China or a rise in China’s exchange rate is more likely
to help solve Australia’s balance of payments problems.
[6]
Balance on goods and services (seasonally-adjusted)
Balance on goods and services (trend)
Source: Australian Broadcasting Corporation, 8 September 2014
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Section A
Answer this question.
1
Raw sugar trade deal
(a) (i)
Explain one possible reason for the change in the world sugar price between 2011 and
2013.
[3]
(ii)
Explain one possible reason for the difference in the price of sugar in the US and the
world price of sugar shown in Table 1.
[2]
(b) (i)
Mexico and the United States reach deal and avoid trade war
Mexico, the US and Canada are the three members of the North American Free Trade Agreement,
which has given Mexico’s sugar producers free access to the US market since 2008. In March
2014, however, the association that represents the US sugar industry accused Mexican sugar
producers of dumping cheap, subsidised sugar into the heavily protected US market and costing
US sugar producers nearly US$1 billion in income in 2013–14.
The US government threatened to impose duties on imports of sugar from Mexico, and Mexico
was proposing to impose retaliatory duties on some US products imported into Mexico. A deal has
now been reached to avoid these protectionist measures and thus prevent a possible trade war.
What is meant by ‘dumping’?
[2]
(ii)
Explain why Mexican producers might choose to dump their sugar in the US market. [2]
(iii)
Consider how an economist would decide whether the accusation that Mexican producers
were dumping sugar in the US was justified.
[2]
(c) With the help of a diagram, explain the likely impact on the US market for raw sugar if a
minimum price higher than US$0.21 had been imposed in 2013.
[3]
(d) Consider who, if anybody, in the US and Mexico might benefit from a trade war despite the
advantages of free trade.
[6]
The deal would set a minimum price for sugar to guard against undercutting or keeping US prices
artificially low, and limit the amount of sugar that may enter the US market. Mexico could export
1.4 million tonnes of sugar to the US in 2014. That compares with an estimated 1.9 million tonnes
for the 2013 crop year. Companies such as chocolate producers and soft drink manufacturers may
also be relieved they will not have to pay higher prices for Mexican sugar now that the large duties
have been avoided. The US is a net importer of sugar and Mexico is one of its largest suppliers.
Under the agreement Mexican producers agreed to sell at a minimum price of US$0.21 per pound
weight (about US$0.46 per kilo) for raw sugar, much lower than would have applied if the import
duties had been imposed on the sugar.
Source: Reuters, 27 October 2014
Table 1: Price of raw sugar 2011–2013
World sugar price
(US$ per pound weight)
Sugar price in US
(US$ per pound weight)
2011
0.27
0.38
2012
0.22
0.29
2013
0.18
0.21
Source: United States Department of Agriculture
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Section A
Table 1: US Trade in Goods with India 2009–2014
Answer this question.
1
Free Trade and Protectionism
The US wins World Trade Organisation (WTO) trade enforcement disputes
The US has won a major victory at the WTO on behalf of the nation’s farmers and the poultry
industry. The WTO found in favour of the US in a dispute challenging India’s ban on agricultural
imports from the US such as poultry, meat, eggs and live pigs, allegedly to protect India from
the spread of disease. The panel agreed that India’s ban broke international trade rules and was
imposed without sufficient scientific evidence.
This is the fourth major WTO victory that the US has announced this year. The US government is
determined to extend economic opportunity for US workers, farmers and businesses.
Earlier US victories at the WTO in 2014 were:
2009
2010
2011
2012
2013
2014
Exports
(US$ millions)
16 441
19 249
21 542
22 106
21 842
23 600
Imports
(US$ millions)
21 166
29 533
36 155
40 513
41 845
45 228
Source: US Census Bureau
(a) (i)
Compare the US balance of trade with India in 2009 with that in 2014.
[2]
(ii)
Explain two factors, other than India’s ban on US agricultural products, that could explain
the change in the US balance of trade that you have identified.
[4]
(iii)
In addition to the balance of trade in goods, what other balances would you require to
calculate the US current account balance with India?
[2]
• In June, the WTO found that China broke rules by imposing unjustified extra import duties on US
cars. In 2013, an estimated US$5.1 billion of US car exports were covered by those duties.
(b) (i)
(ii)
• In August, the WTO found that China broke WTO rules by imposing quotas on Chinese exports of
tungsten and molybdenum. These are important raw material inputs used by US manufacturers
of products such as car batteries, wind turbines, energy-efficient lighting, steel, petroleum and
chemicals.
What is likely to determine the extent of the change in sales when an import duty is
imposed on US cars in China?
[2]
(iii)
Explain a possible reason why China imposed export quotas on tungsten and
molybdenum.
[2]
• Also in August, the WTO agreed with the US that Argentina’s import-licensing requirement
and other import restrictions broke international trade rules. The Argentine measures unfairly
restricted imports of US goods, potentially affecting billions of dollars of US exports, including
computers, industrial and agricultural chemicals, transport equipment, machine tools, parts for
oilfield rigs and refined fuel oil.
Use a diagram to show how an import duty on a product affects its price.
[2]
(c) Consider whether the protectionist measures adopted by countries such as India, China and
Argentina regarding trade with the US could ever be justified.
[6]
Source: The Prairie Star, 19 October 2014
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2
Section A
Answer this question.
1
Economic problems in Kyrgyzstan
Rouble decline affects Kyrgyzstan
Kyrgyzstan is a developing economy which has a border with Russia. At the local market in the
capital, Bishkek, the price of meat increased by 9% in six weeks in 2014. A local butcher said that
as a result sales had fallen. ‘I usually sell 400 kilos of meat every month, but in September I sold
only 250 kilos,’ she complained. In Bishkek, food prices increased by up to 25% over 12 months.
Another shopkeeper increased what he charged for flour by 15%, but sales did not decline by
very much. ‘We all need flour because we all need to eat bread, macaroni, dough,’ he said. ‘It’s not
something people can cut back even if it becomes very expensive.’
Meanwhile, a sharp decline in the value of Russia’s currency, the rouble, since early September
is having an impact upon countries across Central Asia, where economies are dependent on
remittances (transfers of income) from workers in Russia. By October 2014 the value of the
rouble had fallen 20% against the US dollar since the start of the year. The fall had accelerated
in September as the price of oil – Russia’s main export – dropped to a four-year low. As local
currencies followed the value of the rouble downward, the costs of imported essentials rose.
In Kyrgyzstan, remittances from the millions of workers in Russia have started to fall. In recent
years, these cash transfers have contributed the equivalent of about 30% of national income to
Kyrgyzstan’s economy. As the rouble depreciates, however, it purchases fewer US dollars to send
home. Any further drop may significantly reduce consumer demand.
This month the International Monetary Fund said it expects consumer prices in Kyrgyzstan to
increase by 8.0% in 2014 and 8.9% in 2015, compared with 6.6% last year. One factor that could
have an effect is a policy shift at Russia’s central bank, which has already spent over US$50 billion
this year attempting to protect the value of the rouble. Some people have condemned efforts to
support the currency, arguing that a weaker rouble is good for exports.
In Kyrgyzstan the central bank has used some of its limited reserves to reduce the fall in the
currency. Nevertheless, Kyrgyzstan’s currency, the som, has fallen in value by 12% against the US
dollar this year.
Source: Adapted from Asia Times Online, October 2014
(a) (i)
Calculate the price elasticity of demand for meat in Bishkek.
[2]
(ii)
How does the price elasticity of demand for meat differ from the price elasticity of demand
for flour in Bishkek?
[2]
(iii)
How might an economist explain this difference?
[2]
(b) With the help of a supply and demand diagram, explain how the Russian central bank is
‘attempting to protect the value of the rouble’.
[3]
(c) Consider the extent to which the economic performance of Kyrgyzstan would be affected by
the fall in remittances from Russia.
[5]
(d) Discuss whether the actions of the Russian and Kyrgyzstan governments in protecting the
value of their currencies are likely, on balance, to have benefited their economies.
[6]
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Copyright Acknowledgements:
Question 1
Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.
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3
Section A
(a) (i)
State the country shown in Table 1 that has the greatest deficit on its balance of trade in
goods with Vietnam.
[1]
(ii)
Identify the three other components of the balance of payments that would allow you to
calculate the current account balance of Vietnam with that country.
[3]
Answer this question.
1
Concern in Vietnam over trade with China
(b) Explain any two
January–July 2014
United
States
China
Japan
South
Korea
Germany
Exports of
Goods
(US$ billion)
15.9
8.6
8.5
3.7
2.9
Imports of
Goods
(US$ billion)
3.7
(c) Explain how subsidies for all Vietnamese goods and a boycott of Chinese goods are expected
to help Vietnamese goods to compete with Chinese goods. Use supply and demand diagrams
to support your answer.
[6]
(d) Discuss whether the principle of comparative advantage would justify the support of
23.7
6.9
12.2
the potential to compete.
1.4
[6]
Section B
Source: Vietnam Customs
Answer one question.
2
Vietnam is enjoying rapid growth but its small businesses are being overwhelmed by a huge
influx of cheap, mass-produced goods from China. These goods are undercutting the prices of
domestically produced items. A Vietnamese entrepreneur has a rescue plan designed to support
new business start-ups. He has spent US$27 million developing his V+ shopping mall. He is now
offering new businesses rent-free 50-year leases in the mall, which is located in Hanoi – as long
as they sell only Vietnamese-made products. He is also urging the Vietnamese government to
introduce this idea nationwide to prevent the closure of tens of thousands of businesses each year
and encourage customers to buy Vietnamese products.
(a) Explain the difference between public goods and private goods. Consider why profit can be
made through the supply of one type of good, but not the other.
[8]
(b) Discuss why merit goods may be under-consumed in a mixed economy. Consider whether
maximum prices or education campaigns would be more effective in ensuring that these
goods are supplied in appropriate quantities.
[12]
3
(a) Explain the factors that are likely to make the supply of a product relatively price inelastic. [8]
(b) Discuss the ways in which businesses might attempt to increase the price elasticity of supply
of their products. Assess whether these attempts are likely to be successful.
[12]
the yuan, triggered fears of China overwhelming Vietnam with even cheaper goods. As a result,
4
Despite the Vietnamese dislike of Chinese products, their prices make them unavoidable when
Vietnamese businesses lack funds and household budgets are modest. There have been calls for
boycotts of Chinese goods but they have all failed miserably.
(a) Explain what is used as money in a modern economy. Consider how an increase in the money
supply can cause inflation.
[8]
(b) Discuss the consequences of high inflation. Consider whether the internal consequences can
ever be more serious than the external consequences in an economy that has extensive
foreign trade.
[12]
An economist at the Asian Development Bank, however, said the V+ concept showed good
intentions but the government should only support firms with the potential to compete. “There
for all goods towards targeted subsidies for industries with the potential to compete.”
Source: Martin Petty, The Times, 18 April 2015
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3
Section A
(a) (i)
Answer this question.
(ii)
Calculate the level of aggregate demand in Thailand in 2014.
[1]
In which category of expenditure would the various infrastructure projects be placed? [1]
(b) Explain how a fall in the rate of interest would be likely to affect expenditure on
1
Household consumption
US dollars
(billions)
% National
243
55.6
Capital goods
98
22.4
Government consumption
69
15.8
Exports
280
64.1
Imports
253
57.9
(i)
consumption,
[3]
(ii)
exports.
[3]
(c) Explain how changes in any three demand factors might account for the greater rate of
growth in numbers of visitors into Thailand from China than from other countries.
[6]
(d)
represents the highest proportion of total spending in Thailand.
Section B
Source: United Nations data
Answer one question.
2
after several quarters of disappointing performance by increasing public sector investment in
several large infrastructure projects, including roads, railways and airports. These projects
currency. It is hoped that this public sector investment will encourage the private sector to
increase their investment spending.
private consumption due to increases in farm prices, which are crucial to household
purchasing power, as well as a strong tourism sector.
[6]
(a) Explain the different ways in which resources are allocated in a market economy and in a
mixed economy.
[8]
(b) Discuss the effectiveness of supply-side policies in increasing the supply of enterprise to the
economy.
[12]
3
(a) With the use of diagrams, explain how the price elasticity of demand for a product influences
the incidence of an indirect tax on that product.
[8]
(b)
Regarding the export sector, which remains the biggest engine of growth, the outlook is
Source: The Nation, 18 August 2016
(b) Discuss whether a high rate of inflation or a deficit on the current account of the balance of
payments is the more serious problem for an economy.
[12]
The Thai tourism industry is projected to record international visitor arrivals of 16.67 million
countries of Cambodia, Laos and Myanmar.
Source: Thailand Business News, June 2016
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3
Section A
(a) (i)
balance in 2010?
[2]
goods with China over the period 2010 to 2015?
[2]
Answer this question.
(ii)
1
European Union (EU) to boost protection of steel industry as imports flood in
The EU is expected to strengthen its protection against steel imports, possibly as early as October
2016, as a global trade war in steel intensifies and steel imports keep flooding into the EU.
(b)
The EU has strengthened trade defences over the past year, imposing anti-dumping tariffs on a
range of steel products. These tariffs range from 18% to 25% for imports of steel from China. It is
expected that these duties will be increased in October. EU data shows that 27% of steel imports
come from China. The EU now has 37 anti-dumping and anti-subsidy measures in place for steel
products, 15 of them against China.
(c) With the help of a diagram explain how the imposition of import tariffs on steel will protect
domestic producers of steel in India.
[4]
estimated 300 million tonnes of overcapacity, but the Chinese government denies its firms are
dumping by selling steel at below the cost of production. It says global steel overcapacity is due
to the collapse of demand after the 2008 financial crisis. Countries from Asia to the Americas
disagree with China. The United States (US) claims that the Chinese government is subsidising
its steel industry and that this is a form of protectionism that gives Chinese steelmakers an unfair
advantage in world markets. It has imposed tariffs of up to 450% on some types of Chinese steel.
India has also imposed tariffs on steel imports from a number of countries including China, Japan,
Russia, Brazil, Indonesia and South Korea.
(d) (i)
Explain who could lose in China as a result of the imposition of tariffs on Chinese steel.
[2]
(ii)
Explain who could lose in the EU as a result of the imposition of tariffs on Chinese steel.
[2]
(e) With reference to the principle of comparative advantage, discuss whether the increase in
exports of EU services to China could justify free trade in the market for steel.
[6]
Section B
Source: EurActiv.com with Reuters, August 2016
Table 1.1: EU exports and imports of goods to and from China 2010–2015
(billions of euros)
2010
2011
2012
2013
2014
2015
Exports of goods
113.5
136.4
144.2
148.2
164.6
170.4
Imports of goods
283.9
295.1
292.1
280.1
302.1
350.4
Source: Eurostat
Answer one question.
2
(b) Discuss the extent to which the concepts of price elasticity of demand, income elasticity of
demand and price elasticity of supply would be helpful to an organisation responsible for the
growth of tourism to a holiday resort.
[12]
3
2010
2011
2012
2013
2014
2015
19.5
21.7
25.2
27.7
29.1
36.0
Imports of services
17.2
17.7
19.6
21.1
22.9
25.7
Source: Eurostat
© UCLES 2018
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(a) Explain how the rate of deflation is measured and the impact of a period of deflation on
an economy.
[8]
(b) Analyse how fiscal policy and monetary policy could be used to solve the problem of deflation.
Assess which policy is likely to be more effective.
[12]
Table 1.2: EU exports and imports of services to and from China 2010–2015
(billions of euros)
Exports of services
(a) Explain the significance of cross elasticity of demand values that are negative, positive
and zero.
[8]
4
(a) Explain the features of a public good. Consider whether a motorway (highway) provides an
example of a public good.
[8]
(b)
lead to a rise in the rate of inflation. Use aggregate demand and aggregate supply analysis to
support your answer.
[12]
© UCLES 2018
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2
3
Section A
(a) (i)
Answer this question.
1
(ii)
Explain one possible change in a demand factor and one possible change in a supply
factor which could have caused the overall trend in the Indian air travel market.
[4]
The air transport market in India
(b) Name and give an example of each of two factors of production that are required by airline
operators.
[2]
Over the past 20 years or so, global air transport markets have become more competitive. This
is especially the case in the United States (US), the European Union (EU) and, most recently,
(c)
often in domestic markets.
Use a diagram to analyse the effects of this increase on the market for aviation fuel. Explain
what would determine the incidence of this tax between the aviation fuel producers and the
airline operators who buy the fuel.
[6]
The situation in India is typical but only to a certain extent. The country has two established
airline operators with extensive international as well as domestic service networks. They now face
(d) Discuss whether ending the 5/20 rule would be likely to be of overall benefit to the Indian
economy.
[6]
Consumers have benefitted from these changes. As well as opening new routes, the increased
competition has seen all airline operators offering cheaper prices. At the same time, the established
airline operators have had to reduce costs to remain competitive. Also, demand has increased for
leisure travel as well as business travel.
Section B
The Indian air transport market still has some restrictions imposed by the Indian government. An
Answer one question.
have a minimum number of aircraft (20) and have been in business for a minimum of 5 years,
before they can operate international services.
2
(a) Using examples, explain why some goods cannot be provided as private goods.
[8]
(b) Discuss whether all forms of transport should be subsidised by the government.
[12]
Opponents to the 5/20 rule argue that it seriously discriminates against Indian airline operators by
not allowing them to compete in a free market. They further claim that applying the rule is having
3
share of international passenger traffic to and from India, do not have to meet the 5/20 rule.
(a) Explain how a government intervenes to manage the value of its currency in the foreign
exchange market.
[8]
Source: Times of India, 27 February 2016 and The Mint, 25 February 2016
(b) Discuss the likely effects of the devaluation of the yuan on both the Chinese economy and
countries that trade with China.
[12]
100
80
4
Number of
60
passengers
carried
(millions) 40
(a) Using a diagram, explain the significance for an economy of the interaction of aggregate
demand and aggregate supply.
[8]
(b) Analyse the causes of an increase in aggregate supply. Discuss the extent to which this
might be beneficial for an economy.
[12]
20
0
1971
1980
1989
1998
2007
2015
Fig. 1.1: Air transport – total number of domestic and international passengers
carried by Indian-owned airline operators, 1971–2014
Source: Trading Economics.com, accessed 5 March 2016
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Section A
(million Euros)
Answer this question.
2014
1
Balance of trade in goods
Poland: a growing economy
Balance of trade in services
9 059
Balance on primary income
Since 1995, Poland has grown faster than all other large economies at a similar level of
Balance on secondary income
–377
2015
2 213
1 949
10 915
13 700
–14 935
–15 859
–846
–1 063
expenditure rose and exports dramatically increased, coming close to US$250 billion in 2013.
Source: National Bank of Poland
(a) (i)
expanding the quantity and quality of education. In 2015, 50% of young people studied at university
level, up from 10% in 1989. Secondly, the Polish government used funds from the European Union
(EU) to develop transport links that helped to connect Poland with Western Europe.
(ii)
Give an example of an item included in the balance on primary income.
[1]
Give an example of an item included in the balance on secondary income.
[1]
(iii)
Poland seems to have been thorough in introducing market-oriented reforms at the beginning of
its transition from a planned economy in the 1990s. This helped to create a private sector boom
and ensured Poland avoided a post-transition recession. It managed the privatisation process in
an efficient way. Lastly, Poland benefited from a large and rapidly growing domestic market, which
helped to insulate it from external shocks, such as the global financial crisis in 2007–08.
(b) Identify two policies adopted by the Polish government that could be considered as supplyside policies.
[2]
(c) Explain, with the help of a diagram, why the imposition of an indirect tax, such as a general
sales tax, could discourage entrepreneurs from investing.
[4]
(d)
Source: Marcin Piatkowski: Brookings Institution, February 2015
(e)
investment. The outlook for 2017 was also gloomy, with concerns regarding the global economy
and domestic economic policy. Private consumption and public investment were expected to
continue to be strong, but a significant slowdown in economic activity was expected throughout
the year.
This was because of a significant decline in investment by private companies. In the first half
of 2016 companies were cutting spending on fixed capital. A survey by the Polish central bank
indicated that companies were very reluctant to start new investments. Entrepreneurs were afraid
increased indirect taxes such as general sales taxes. In addition, foreign companies were delaying
major investments in Poland because of the uncertainties in the economic climate.
After a period of rising net exports of goods, by 2016 the trend was reversing mainly due to a
decline in demand from the larger EU economies. The outlook for 2017 was not any better and the
fall in net exports of goods was expected to be the main factor slowing down the Polish economy.
boosted in 2017. The government could increase the budget deficit and take other demandstimulating actions. An interesting suggestion from the government was to decrease the retirement
age back to its 2012 level (65 years for men and 60 years for women). All of these proposals might
keep GDP growth above 3% until the end of the year.
Source: Adam Czerniak, Poland Today, Issue 13, March 2017
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Section A
Fig. 1.1: Yuan–US dollar exchange rate, 2014–2017
Answer this question.
7.0
6.9
1
Trade tensions between China and the United States
6.8
At a World Economic Forum meeting in Switzerland in 2017, the Chinese President
6.7
Yuan per US
dollar
and he repeatedly threatened to impose tariffs and import quotas on Chinese goods.
6.6
6.5
6.4
During 2016, the value of the US dollar rose against most currencies. In contrast, the Chinese
yuan weakened significantly from 6.20 yuan per US dollar at the end of 2014 to 6.95 yuan
at the end of 2016. The US President has accused China of intentionally devaluing the yuan
6.3
6.2
6.1
6.0
that it does not want the yuan to fall in value any more than the US does, but no country has
2014
2015
2016
2017
China, like Japan and Germany, usually has a current account surplus on the balance of
Source: Trading Economics
(a) Describe, using Fig. 1.1, how the value of the yuan against the US dollar has changed
between 2014 and 2017.
[2]
(b) The US President threatened to increase protectionism of the US economy.
can work.
Source: Adapted from China Daily, 10–12 February 2017
(c)
two
(d)
two
one of the methods of protection mentioned in the article
[4]
[4]
(e)
US and China.
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Section A
(a) (i)
Answer all questions.
(ii)
1
With reference to Table 1.1 calculate the percentage rate of inflation in Egypt between
(b) Identify two
Table 1.1: Egypt, selected economic indicators, 2014–2019
Consumer Price
Index
(base year 2000)
Current account
balance
(US$ billion)
(c) Explain how the decline in the value of the Egyptian pound could cause demand-pull inflation
and cost-push inflation in Egypt.
[4]
Unemployment
rate
2014
304
13.4
2015
337
12.9
2016
371
12.7
(d) Explain how the estimated changes in unemployment in Table 1.1 might be expected to affect
the current account balance of Egypt after 2016.
[6]
(e)
likely to succeed in curing the inflation problem.
2017
not available
2018
not available
Section B
2019
not available
Answer one question.
2
[6]
(a) Explain how economists use the concept of elasticity to distinguish between inferior goods
Source: International Monetary Fund, World Economic Outlook Database, April 2017
(b) Discuss how businesses might attempt to change the price elasticity of demand for their
products and consider which approach is most likely to be successful.
[12]
annual inflation rate surged to 32.9% in April 2017, compared to 10.9% in 2016. This is considerably
3
(a) Distinguish between regressive and progressive taxes and explain whether you would use an
Inflation had been rising in Egypt since the decision of the Central Bank of Egypt (CBE) in
(b) Discuss whether subsidies on the production of all types of good will lead to an improved
allocation of resources.
[12]
reform programme, started in 2014, to reduce the budget deficit and acquire a US$12 billion loan
4
(a)
attributed to the effects of the weaker Egyptian pound. Inflation was also made worse by levying a
On the same day as the CBE floated the Egyptian pound it raised the interest rate by 3 percentage
(b) Discuss the arguments that are used to justify protectionism and consider whether these
arguments can ever be justified.
[12]
It was expected to broaden the tax base in a country where the government struggles to collect
income tax because of a large informal economy and widespread tax avoidance. The VAT does
not apply to basic goods and services to protect the poor.
Source: Islam Al Naggar, Egypt Today, 10 May 2017, and Reuters, 29 August 2016
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3
Section A
Answer this question.
1
10
5
0
Annual
–5
percentage (%)
–10
growth rate
–15
–20
–25
Difficult times for OPEC and Nigeria
The Organisation of Petroleum Exporting Countries (OPEC) has 13 members and produces over
30 million barrels of oil a day, responsible for half of global production. Its members, strongly
influenced by Saudi Arabia, seek to limit the supply of oil in order to sustain stable prices to aid
their own economic development.
OPEC members have become concerned about the increase in oil production in the United States
(US) due to the use of fracking (a new technique for extracting oil) and its impact on world oil
Q1
Q2
Q3
Q4
Q1
2015
in a bid to bankrupt higher-cost US producers. The effects were remarkable. A 12% increase in
Q2
2016
Q3
Source: Nigerian Bureau of Statistics, 2016
(a)
In late 2016, it was clear that governments in OPEC countries were suffering from reduced oil
revenues. There was also growing evidence that US oil producers had been able to cut costs to
(b)
This was thought to be the minimum price for producing oil in the US. In a surprising change of
policy, OPEC decided to cut its oil production by 3%. The result was a 10% increase in the world
price of oil.
(c)
What evidence is there in the information to support this claim?
[2]
(d)
this period, total national output for Nigeria fell by an annual rate of only around 2%.
What can be inferred from this about the relative importance of the non-oil sectors in Nigeria?
[2]
a measure of total national output, has continued to fall along with oil output. The slowdown in the
economy has affected taxation paid to the government. In addition import restrictions have been
put in place to try to offset a severe shortage of foreign currency.
(e) Analyse, using aggregate demand and aggregate supply,
Source: Sunday Telegraph 4 December 2016
(f)
Discuss, with the help of the information, the extent to which OPEC will be able to control the
world price of oil.
[6]
2.5
2
Oil output
(million barrels
per day)
1.5
1
0.5
0
Q1
Q2
Q3
2015
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Q4
Q1
Q2
2016
Q3
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Section A
Answer this question.
1
30
28
The impact of demonetisation in India
26
India has a vast informal economy, where products and labour are exchanged for cash without
official records, so that the authorities cannot easily trace the transactions. In November 2016, this
24
1000 rupee notes. This policy removed 14 trillion rupees of cash from the most cash-dependent
major economy in the world. There were long queues outside banks as people tried to open bank
accounts to deposit these notes before they were no longer valid.
22
20
2014
2015
2016
The policy was intended to remove cash hoarded by the very rich elite, criminals and the large
number of people who did not pay tax. The government later said that demonetisation was also
India through the banking system so that the tax authorities could trace them. In 2016, only 1% of
workers paid income tax.
employees through bank accounts, a hugely ambitious step in a country where as many as 90%
of workers were paid in cash. Many business owners were dreading the prospect of paying their
employees through bank accounts. One factory owner in Delhi commented: “How do you think I
2017
Source: Trading Economics
(a) (i)
supply.
[2]
shown in Fig. 1.1, after the most used bank notes were withdrawn from circulation.
[2]
(ii)
(b) Explain whether a cheque should be regarded as money.
[2]
(c)
likely to affect the use of cash as a store of value in India over time.
of working life in India. Another factory owner stated that this would affect the production process:
“Rickshaw pullers transfer goods from my factory to the shops. For one trip I pay a rickshaw puller
[4]
(d)
(e) Discuss whether demonetisation in India is likely to be inflationary.
[6]
The workers are also concerned about the change to the law that will force them to have their
wages paid directly into banks. Money performs a number of important functions in an economy
and cash has an acceptability that still matters for many workers. One worker commented: “I am a
daily wage worker and I am not sure if I will have a job tomorrow. If I receive cash in hand, I know
If demonetisation is to succeed, the Indian government will need to introduce incentives to
persuade millions of people to open bank accounts. However, this will not be easy to achieve
because around 30% of people in India still do not have bank accounts.
circulation and balances in bank deposits that can be spent immediately e.g. through withdrawals,
cheques or debit cards.
Source: Adapted from The Guardian, 21 December 2016
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Section A
Answer this question.
1
Balance of trade in goods and services
(US$ million)
Current account balance
(US$ million)
Ethiopia to develop through infrastructure investment
Extract 1: Ethiopia economic overview
With 99.4 million people, Ethiopia has the second largest population in Sub-Saharan Africa. Its
Year
2011, 33.5% of the population lived in extreme poverty.
The economy has experienced strong and broad-based growth over the past decade, averaging
10.8% per year between 2003 and 2015 compared to the regional average of 5.4% per year.
Private consumption and public investment have been the main drivers of aggregate demand in
recent years.
In 2017, the government was implementing the second phase of its Growth and Transformation
Plan (GTP II), due to run from 2015 to 2020. Its aim was to continue improvements in physical
infrastructure through public investment, transforming the country into a manufacturing hub. The
goal was to reduce poverty in Ethiopia by 2025.
Developments in the balance of payments in Ethiopia have been largely driven by the
implementation of major infrastructure projects in the country that contributed to higher current
account deficits, balanced by growing foreign direct investment (FDI) and long-term foreign
borrowings.
Source: World Bank, April 2017
Extract 2: Ethiopia plans US$90 million infrastructure spending spree
Despite Ethiopia being a landlocked country, the vast majority of its imports and exports are
conveyed by sea. The ports in neighbouring country Djibouti are crucial to Ethiopia because they
are used for 90% of its trade.
2012
2013
2014
279
1281
2132
2168
Source for tables: IMF World Economic Outlook, October 2016
(a) (i)
(ii)
Suggest two
from its balance of trade in goods and services in 2015 as shown in Table 1.1.
[2]
Explain one
operating the new railway line to Djibouti.
[2]
(b) Identify two
in Ethiopia.
[2]
(c) Use a production possibility curve to explain the opportunity cost that Ethiopia would face if it
did not have access to help from China in building new infrastructure.
[4]
(d) Consider whether a road network, such as that upgraded in Ethiopia with government funds,
should be classified as a public good.
[4]
(e) Use aggregate demand and aggregate supply analysis to discuss how output, employment
and prices might be affected by the development of infrastructure in Ethiopia.
[6]
Addis Ababa, to the main port in Djibouti, cutting the travel time along the route from three days
to just 12 hours. It was expected to cut the cost of transporting freight by a third, having a huge
impact on trade flow and the lives of Ethiopians.
The project was partially built and funded by Chinese companies with the assistance of the Chinese
government. China Railway Group and the China Civil Engineering Construction Corporation built
were awarded to Chinese firms to build various sections of the railway. Chinese investment in
China has an overcapacity in steel and needs to find markets for its excess supply. China also has
the technical expertise and companies available to assist in major foreign infrastructure projects.
Chinese infrastructure investment in Ethiopia is not just limited to the railway network. Chinese
firms are also building more than 65% of the new roads in Ethiopia including the prominent Addis
Ababa ring road. As part of its policy of investing in infrastructure, the Ethiopian government is
Source: Neil Ford, African Business, 21 March 2017
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Section A
Answer this question.
120
115
1
China and India: BRICS partners yet competitors
110
Terms of
trade
105
index
(2012 = 100) 100
BRIC is a term referring to the economies of Brazil, Russia, India and China. It originated from
growing market economies in the twenty-first century and that by 2050 they would be amongst the
wealthiest economic powers. South Africa was added to the group in 2010 resulting in them being
known as BRICS economies.
95
90
2012
It should be stressed that the five BRICS economies are not a formal trading organisation like the
European Union, although their leaders do meet annually to discuss global economic issues of
common concern and relevance.
Of the five countries, China and India in particular compete with each other in world markets. India
is following China in embarking on a policy of growth in its manufacturing industries; it is also a
major exporter of agricultural goods to neighbouring countries in south-east Asia.
Table 1.1 below shows that India has experienced the highest rate of consumer price inflation of
all BRICS economies since 2008. It has also experienced a rapid deterioration of over 30% in its
terms of trade. There are serious doubts over whether Indian products really can compete with
those from China in world markets.
Table 1.1: Consumer Prices Index (CPI) for BRICS economies, 2012–15 (2008=100)
2012
2013
2014
2015
Brazil
124.5
131.8
140.2
155.2
Russia
136.0
145.2
156.5
180.8
India
147.7
163.8
174.1
184.4
China
110.9
113.8
116.1
117.7
South Africa
123.9
131.0
130.0
145.4
2013
2014
2015
2016
Source: Trading Economics
(a) (i)
Using Table 1.1, compare the rate of inflation for China and India between 2012 and
2015.
[2]
(ii)
Explain two possible reasons why the CPI might not be an accurate measure of inflation
in a BRICS economy such as India.
[4]
(b) Explain one possible aggregate demand reason and one possible aggregate supply reason
for the differing rates of inflation in the BRICS economies since 2012.
[4]
(c) (i)
(ii)
to the end of 2016.
[2]
Explain one possible reason for this change.
[2]
(d) With the help of the information, discuss what is likely to be the most important factor that will
determine how successfully India can compete with China when trading in world markets. [6]
Source: BRICS Joint Statistical Publications
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Section A
Extract 2: Winners and losers in the US–China trade war
Answer this question.
1
The US government imposed a first round of tariffs on Chinese goods on 6 July 2018, by
introducing 25% taxes on US$34 billion of Chinese imports. These were a response to China’s
“unfair trade policies” – the US claimed China was selling Chinese products in the US below their
normal price, called ‘dumping’, as well as subsidising the production of goods exported to the US.
It was then announced that tariffs on a further US$50 billion worth of imports from China would
come into effect. The US threats have risen since, with the president saying he is ready to impose
tariffs on all US$500 billion of Chinese imports.
Trade war breaks out between the United States (US) and China
100
US$ billion
services
50
primary income
0
–50
China has retaliated, saying it will levy new tariffs on more than 5 200 US products, if the US
government proceeds with its latest tariff threat. The duties would range from 5% to 25% on
US$60 billion worth of US products imported into China, including further agricultural products
such as soya beans.
secondary income
–100
–150
–200
–250
goods
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010
2011
2012
2013
2014
2015
2016
2017
2018
Fig 1.1: Components of the US current account, Q1 2010 to Q1 2018
Both countries will lose in a major trade war, but the losses will differ in kind and amount. It could
cut China’s exports to the US by about a third, some US$200 billion annually. Eventually, Chinese
firms will find new markets and create new products to compensate. For a period of two or three
years, however, the disruption to workers and firms will be enormous. As many as 4 million
Chinese workers could become unemployed, and many Chinese firms will go out of business.
6.90
6.80
yuan per
US dollar
The US government imposed tariffs because they said that the “unfair trade practices” have
resulted in a US trade deficit with China, but this makes no sense. The trade deficit is an inevitable
by-product of a robust US economy, a large US fiscal deficit and a strong US dollar. If correcting
the US trade deficit is the government’s policy aim then it should raise US taxes to reduce the
fiscal deficit and the US central bank should act to lower the value of the US dollar against China’s
currency, the yuan.
6.70
If US exports to China are cut by a third in a major trade war, the US will lose about US$50 billion
of exports annually. About 250 000 US workers will lose their jobs. If US firms can see no end to
the trade war, they will reorganise and locate production in lower-cost countries like Vietnam and
Peru. The Chinese government, however, will strongly encourage Chinese firms to produce many
of their goods at home, even though the cost will be much higher.
6.60
6.50
6.40
Source: Gary Hufbauer and Mercy A Kuo, The Diplomat, 11 July 2018
6.30
Aug Sep Oct Nov
2017
Dec
Jan Feb Mar
Apr May Jun
2018
(a) (i)
Using Fig. 1.1, how is the US balance of trade in goods in Q1 2018 different from that in
Q1 2010?
[2]
(ii)
Explain how China’s imposition of tariffs of 25% on cars from the US might have
contributed to the change you have identified.
[2]
(b) (i)
Using Fig. 1.2, how has the value of the yuan against the US dollar changed between
April and July 2018?
[1]
(ii)
Identify and explain one factor that will determine the impact of this exchange rate
change on China’s balance of trade in goods.
[3]
Jul
Fig. 1.2: Chinese yuan to US dollar rate of exchange, August 2017 to July 2018
Extract 1: The US government says, ‘We are confronting China’s unfair trade policies’
For many years, China has pursued industrial policies and unfair trade practices – including
dumping, discriminatory non-tariff barriers and industrial subsidies – that favour Chinese firms
and make it impossible for many US firms to compete. China imposes much higher tariffs on US
exports than the US imposes on China. China’s average tariff rate is nearly three times higher than
the average US rate. Certain products are even more imbalanced, for instance the US charges
a 2.5% tariff on Chinese cars, while China currently maintains a 25% tariff on cars from the US.
China has banned imports of some US agricultural products, excluding US farmers from a major
market for their goods. China has dumped and unfairly subsidised a range of goods for the US
market, undermining US domestic firms. In 2018 alone, the US government has found dumping or
unfair subsidies on 13 different products.
(c) Explain how, ‘a robust US economy, a large US fiscal deficit and a strong US dollar’ could
each contribute to a US trade deficit.
[6]
(d) With reference to economic theory, discuss whether the US economy is likely to benefit
overall from the trade war with China.
[6]
Source: The White House, US government, 29 May 2018
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Section A
Answer this question.
1
Nigeria discovered oil 50 years ago and is now the world’s sixth biggest oil exporter. The
recent increase in global oil prices has had a very large positive effect on the country’s
balance of trade and has also improved the country’s terms of trade.
[3]
(ii)
Explain why ‘free trade zones’ (FTZ) can be considered a supply-side policy.
[2]
Explain how measures to reduce protection through policies such as ‘free trade zones’
encourage specialisation and the development of comparative advantage in Nigeria. [4]
(e) Discuss whether government intervention to encourage private sector firms, in a mixed
economy such as Nigeria, is always likely to be successful.
[6]
Section B
Answer one question.
2
(a) Explain, with the aid of a production possibility curve (PPC) diagram, why scarcity makes
choice inevitable for firms and how each choice has an opportunity cost.
[8]
(b) Discuss the view that the only goods a government should produce are public goods.
3
[12]
There is increasing concern about the impact of foreign holidays on the environment of the host
country.
(a) Explain, with the aid of a demand and supply diagram, two factors that might cause an
increase in the demand for foreign holidays.
[8]
Lagos is an important transport hub, with three major ports and West Africa’s most important
international airport. In 2016 the output of Lagos was valued at US$136 billion while Nigeria’s
total national output was valued at US$405 billion.
A former governor of the Nigerian central bank, has stated: “Since 2000, Lagos has been
transformed. In terms of an improved infrastructure and a supportive economic environment,
the government has given firms a greater opportunity to thrive.”
(b) Distinguish between a country’s balance of trade and its terms of trade.
(d) (i)
Lagos is the largest city in Nigeria, with a population of over 20 million, and has undergone a
successful economic transformation in recent years. It has used the private sector to become
the most productive and dynamic part of Nigeria’s economy. The owner of one of Nigeria’s
largest companies has stressed the enormous economic progress that the country has
made in recent years: “I’m a great believer in Nigeria because the opportunities here are
enormous.” His company’s success shows what private enterprise can achieve in a mixed
economy especially if it is provided with the right incentives by the government.
A ‘free trade zone’ on the edge of Lagos has been established where private sector firms
pay no business taxes to the government and there are now numerous start-up enterprises
that are thriving. The government aims to lower costs, reduce bureaucracy and make the
economy more flexible and efficient with the hope of boosting trade. The zone is located next
to a deep sea port and has good road connections with both the rest of Nigeria and other
countries in the region.
[1]
(c) Explain the contribution of the factor enterprise to the successful economic transformation of
Lagos.
[4]
The Lagos economy is working
Most Nigerian entrepreneurs are operating in Lagos and entrepreneurship has certainly
played a key role in the modern Lagos economy. Start-up initiatives have been encouraged
and the need to be innovative has been increasingly recognised, leading to the development
of new goods, services and markets. The city is the centre of thriving music, fashion, film and
technology industries that have significant influence throughout Africa.
(a) Calculate the percentage of Nigeria’s national output that is accounted for by Lagos.
(b) Discuss whether an indirect tax on foreign holidays is likely to be effective in reducing the
number of holidays taken.
[12]
4
(a) Explain, with the aid of a diagram, one demand factor and one supply factor that can cause
the depreciation of a foreign exchange rate.
[8]
Source: Adapted from The Financial Times, 26 March 2018
(b) Discuss whether an appreciation of a country’s foreign exchange rate is likely to cause both
a rise in inflation and a decrease in employment in its economy.
[12]
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2
3
Section A
(a) State what the upward trend shown in Fig. 1.1 means has happened to the value of the peso
between 2016 and 2018.
[1]
Answer this question.
(b) The central bank of Argentina sold US dollars from its foreign exchange reserves to a value of
US$1.5 billion on one day in May 2018.
1
Argentina raises interest rates to 40 per cent
25
With the help of a supply and demand diagram, explain what effect you would expect this
intervention to have on the value of the Argentine peso.
[3]
20
(c) In the extract it is stated that risks to the peso have been developing for some time and that
large budget and current account deficits are some of these risks.
pesos per
US dollar
(i)
15
5
[2]
The extract also states that persistent high inflation represents a risk to the peso.
Central Bank
sells US$1.5 bn of
national reserves
in a day
10
Distinguish between a budget deficit and a current account deficit.
(ii)
Explain one way in which persistent high inflation represents a risk to the peso.
[2]
(d) Use aggregate demand and aggregate supply analysis to explain how the recent interest rate
rises might help Argentina to reduce its annual rate of inflation and achieve its target.
[6]
2017
2018
(e) Discuss whether the potential advantages outweigh the disadvantages to the Argentine
economy if the president is successful in reversing protectionism.
[6]
Fig. 1.1: Argentina’s exchange rate (pesos per US dollar), May 2016 to May 2018
Source: BBC/Bloomberg
Section B
On 4 May 2018, Argentina’s central bank raised interest rates to 40%. The day before this increase
they were raised from 30.25% to 33.25%. A week earlier, they were raised from 27.25%. The rises
were aimed at supporting Argentina’s currency, the peso, which lost a quarter of its value over the
previous year. Despite these rises, the peso, which before the economic turmoil in Argentina in
2001–2002 was fixed at parity with the US dollar, was trading at about 22 pesos to the US dollar.
Risks to the peso had been developing for some time. These included large budget and current
account deficits, a heavy government debt burden, persistent high inflation and an overvalued
currency.
Answer one question.
2
(b) Discuss whether the transition of an economy from one that is centrally planned to one in
which resources are allocated through the free market is likely to be of overall benefit to the
citizens of that economy.
[12]
Inflation, a long-standing problem in Argentina, was 25% in 2017, the highest annual rate in South
America except for Venezuela. The central bank has set an annual inflation target of 15% and has
stated it will continue to take measures to achieve it.
Argentina’s new president is pursuing a pro-market economic reform programme, seeking to
reverse the protectionism and high government spending of previous governments. The president
has pledged to reduce government spending drastically. The political opposition wants to stop him
from removing subsidies on a range of basic household products, including gas and electricity.
Removing the subsidies may bring more inflation in the short term but could help bring it down
from its current high level to an annual rate of about 5% by 2020.
3
In summer 2018, many countries suffered a water shortage because of a long spell of very dry
weather.
(a) Explain whether you would expect the price elasticity of supply of water to be relatively elastic
or relatively inelastic.
[8]
(b) Consider the short-term and long-term policies that could be adopted to deal with a water
shortage in an economy and discuss whether these are likely to be successful.
[12]
International and domestic investors still believe the president has a good plan for Argentina’s
economic recovery, but they are not convinced he has enough political support to achieve it.
Source: BBC News, 4 May 2018
(a) Use a production possibility curve diagram(s) to distinguish between the growth of an
economy and a reduction in the number of unused resources in an economy and explain one
reason that might cause each to occur.
[8]
4
(a) Explain, using examples, the difference between private goods and public goods and why
public goods will not be supplied by private enterprise.
[8]
(b) Consider the problem of the provision of merit goods in a market economy and assess
whether direct provision of such goods is the most effective way to deal with this problem.
[12]
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3
(a) Explain why a plastic bottle can be classified as both a private good and a demerit good. [4]
Section A
(b) (i)
Answer this question.
1
There are an estimated 150 million tonnes of plastic waste in the world’s oceans. Every year,
millions of birds, mammals and fish die from eating or getting tangled in plastic waste. There is
also growing evidence that humans could become ill when consuming fish that has eaten plastic
waste. A recent study found that people who often consume seafood eat up to 11 000 tiny pieces
of plastic each year. Those living in parts of South East Asia and around the Mediterranean sea
are most at risk.
[2]
(ii)
Explain whether the ‘bottle tax’ referred to in the extract is an ad valorem tax or a specific
tax.
[2]
(c) (i)
With the help of a diagram, analyse the impact of the ‘bottle tax’ on the price and sales of
plastic bottles.
[2]
(ii)
With the help of a diagram(s), explain what would determine the incidence of the ‘bottle
tax’ on the consumers of plastic bottles.
[4]
The growing problem of plastic waste
It has been estimated that, globally, consumers buy a staggering one million plastic bottles every
minute and that 91% of these are not recycled. There is now real and growing concern about the
serious threat to marine life caused by the dumping of plastic waste in the sea.
Distinguish between an ad valorem tax and a specific tax.
(d) Discuss whether taxing plastic bottles is the most effective way of reducing plastic waste in
developing economies.
[6]
Section B
The scale of these problems is worst in Asia’s developing economies. For example, a recent report
from Pakistan stated that ‘Continued dumping of plastic products has become a serious threat to
animals and plants inhabiting coastal and offshore waters. People do not seem to understand how
damaging plastic waste is for the oceans.’ This is a typical concern; significantly, no solutions to
these problems have been proposed by Pakistan’s government.
Answer one question.
2
One possible way to tackle the problem is to introduce a ‘bottle tax’ on drinks that are sold in
plastic bottles. The amount of tax would ideally depend on the size of the bottle, for example being
$0.10 for a one litre bottle and $0.20 for a two litre bottle.
Explain price elasticity of supply and suggest why the above estimates differ.
3
In most developed countries the legal disposal of plastic waste is heavily regulated. The most
common method of disposal is for plastic waste to be buried in landfill sites. Interestingly, in China
and India, landfill sites often have very few plastic bottles because people collect bottles and sell
them to gain a source of income.
The demand for plastic products is forecast to increase due to its widespread use in agriculture,
manufacturing and retailing. Unless something is done about the problems of disposal, even
more plastic rubbish will find its way into our oceans. The key issue for many of Asia’s developing
economies is that their options appear to be limited.
[8]
(b) Discuss whether, for a manufacturer of smartphones, knowledge of their product’s price
elasticity of demand or its cross elasticity of demand with respect to other products is more
useful.
[12]
The UK government is considering imposing a ‘deposit return’ scheme similar to those that are
successfully operating in Denmark, Germany and Sweden. Customers would pay a deposit when
buying drinks in plastic bottles and are refunded the deposit if they return the empty plastic bottles
to a retailer.
Another solution to the problem of plastic waste is to create a new product by recycling the plastic;
more research needs to be carried out to evaluate this option, but this research is expensive and
beyond the reach of many developing economies.
(a) The price elasticity of supply for a new smartphone is estimated at 0.8 in the short run and 1.5
in the long run.
The annual rate of inflation in an economy increased sharply and unexpectedly.
(a) Explain the likely consequences of such an increase for consumers and firms.
[8]
(b) Discuss whether a substantial rise in interest rates is the best way of correcting this increased
rate of inflation.
[12]
4
(a) Explain why the theory of comparative advantage may not give a true account of the benefits
of free trade.
[8]
(b) In April 2018, the United States (US) government threatened to impose tariffs of 25% on
a wide range of imports from China including steel, technological products, medicines and
household goods such as washing machines. In turn, China threatened to retaliate with the
same proposed tariff on imports from the US of soya beans, cars and chemicals.
Sources: Dawn, 24 June 2017 and Punjab Daily Times, 1 November 2017
Discuss whether the US and China could both benefit from the imposition of tariffs on goods
such as those identified.
[12]
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Section A
However, not everybody in Latvia supported the introduction of the euro. Many people thought
that Latvia would lose a certain amount of economic independence and that it would lead to
an increase in prices and taxes.
Answer this question.
1
Sources: Adapted from The Financial Times 20 February 2018
Latvijas Banka, accessed October 2018
Latvia becomes a banking capital between the European Union’s (EU’s) east and west
Latvia regards itself as a financial bridge between Europe’s east and west. Since the Soviet
Union’s collapse in 1991, Latvia (population 2.2 million) joined the EU (population 510 million)
in 2004. It has since built itself into a banking centre for people from all parts of Europe and
many other parts of the world, although its reputation as a financial centre has been growing
since 1988 when two entrepreneurs founded a private bank, Parex Bank, in the capital, Riga.
(a) Describe the functions of an entrepreneur in the production process.
[2]
(b) When Latvia joined the EU it became part of a customs union.
How does a customs union differ from a free trade area?
In the early years of the 21st century, favourable credit conditions in Latvia contributed to an
economic boom, but in the global financial crisis of 2007–2008 Parex Bank, by then Latvia’s
second biggest bank, needed government assistance and was nationalised.
[2]
(c) As a result of the global financial crisis in 2007–2008 there was a large capital outflow from
Latvia.
The financial crisis caused Latvia’s annual inflation rate to rise rapidly to 17.7% in May 2008,
which was significantly higher than its average annual inflation rate of 3.7% for the period
1998–2018.
Use a supply and demand diagram to explain how the exchange rate against the euro was
maintained as shown in Fig. 1.1.
[4]
(d) (i)
In 2008, the Latvian government decided to substantially reduce the size of the budget deficit,
in an attempt to reduce the relatively high rate of inflation, through a series of fiscal measures
such as increasing taxation and reducing public spending.
(ii)
Latvia emerged from the global financial crisis to become the EU’s fastest-growing economy.
The intention was that Latvia would eventually join the EU’s common currency (the euro).
Fig. 1.1 below shows the exchange rate of Latvian Lats (the country’s former currency) per
euro from 2007 to 2013.
Explain what is meant by a ‘budget deficit’.
[2]
Analyse, using a diagram, how fiscal measures to reduce the budget deficit could be
used by the Latvian government to lower the relatively high rate of inflation.
[4]
(e) Discuss whether it is better for Latvia to specialise in banking services rather than having a
more diversified economy.
[6]
0.8
Section B
0.7
Answer one question.
0.6
2
0.5
Lats per
euro
0.4
Lats per euro
(a) Explain, with the help of examples, how imperfect information among consumers affects their
consumption of merit goods and demerit goods.
[8]
(b) Discuss why in most mixed economies, resources are mainly allocated using market forces
and the price mechanism.
[12]
0.3
0.2
3
0.1
0
2007
2008
2009
2010
2011
2012
2013
Explain why the cross elasticity of demand figures for bread differ.
[8]
(b) Explain the implications of price elasticity of demand and income elasticity of demand for
business decisions. Discuss which measure is likely to be more useful to a business.
[12]
Fig. 1.1 Exchange rate of Latvian Lats per euro, 2007–2013
In January 2014, Latvia did join the euro and this was welcomed by business leaders and
economists in Latvia, stating that it would improve Latvia’s credit rating and attract foreign
investors. The governor of Latvia’s central bank said: “The euro brings stability and certainty,
definitely attracting investment.”
(a) Cross elasticity of demand for bread with respect to the price of rice is +1.4 while the cross
elasticity of demand for bread with respect to the price of butter is –0.7.
4
(a) Explain, with the aid of a diagram, the impact of a subsidy to domestic producers of a product
on the export revenue from that product.
[8]
(b) Discuss whether supply-side policies are an effective way of correcting a deficit on an
economy’s current account of the balance of payments.
[12]
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(a) With reference to the extract and Fig. 1.1, use supply and demand diagrams to explain the
change in the price of natural vanilla
Section A
Answer this question.
1
Ice cream producers struggle with record vanilla prices
(i)
from 2004 to 2009
[3]
(ii)
from 2015 to 2018.
[3]
(b) Ice cream producers can use natural vanilla or vanillin to produce ice cream.
600
500
(i)
State the concept that an economist would use to measure the responsiveness of the
demand for natural vanilla to a change in the price of vanillin.
[1]
(ii)
Explain the value that you would expect for this measurement.
400
US$ per kg
300
[3]
(c) Explain why the price elasticity of supply of ice cream made with vanillin is likely to be relatively
more elastic than the price elasticity of supply of ice cream made with natural vanilla.
[4]
200
100
(d) Discuss whether the recent rise in the price of vanilla is on balance likely to have a positive or
negative impact upon Madagascar’s economy.
[6]
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
0
Section B
Fig. 1.1 Vanilla Prices, January 2004 to May 2018 (US dollars per kilogram)
The price of natural vanilla hit a record high of US$600 per kilogram in May 2018, making it even
more expensive than silver. As a result, many ice cream producers are considering whether they
should raise their prices or perhaps stop selling the vanilla flavour of ice cream. The price of
natural vanilla has been rising sharply since March 2017 when a cyclone hit Madagascar, which
accounts for 75% of global production. Natural vanilla represents 20% of Madagascan exports,
worth around US$600 million at current prices.
Answer one question.
2
(a) Use a diagram to explain how a subsidy given to producers in the market for vaccinations will
affect the market price and explain the impact of this subsidy upon the consumer surplus in
this market.
[8]
Natural vanilla comes from the vanilla orchid, which produces vanilla beans. Madagascar has the
perfect climate and soil for growing vanilla, but poor harvests have reduced the country’s vanilla
production by more than 20%, leading to a worldwide supply shortage. It takes three years for the
plant to start producing. So if there is a sharp rise in price, people plant more, but then it takes
three years for the new supplies to reach the market.
Vanillin is a synthetic substitute to natural vanilla that can be used in the production of ice cream.
It is made from more reliable sources of plentiful raw materials, such as wood pulp and petroleum
and it has been falling in price. For many years, some of the world’s largest producers of ice cream
replaced natural vanilla with vanillin. A consequence of this falling demand for natural vanilla was
that Madagascar’s farmers earned very low returns and many ceased growing natural vanilla.
Surprisingly, despite there being fewer growers, the price of natural vanilla stayed low between
2005 and 2012.
However, from 2012, concerns about possible health risks arising from the use of vanillin caused
some producers to use more natural vanilla in their ice cream production process. For example, in
2015, one of the world’s largest ice cream producers announced plans to end their use of vanillin
and use only natural ingredients by 2020. In recent years, however, the sharply rising price of
natural vanilla has persuaded some ice cream makers to consider turning back to vanillin. As a
result, some of the leading producers of ice cream have more than a year’s stock of vanillin.
Source: Hong Kong Economic Journal, 9 May 2018
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In some countries vaccinations against infectious diseases are offered at a price and payment has
to be made.
(b) If the cost of the subsidy is to be paid from tax revenues, discuss whether the revenue should
be raised through direct taxes or indirect taxes.
[12]
3
(a) Explain how the factor of production enterprise contributes to aggregate supply in a modern
economy and how it differs from the other factors of production in terms of the reward for its
services.
[8]
(b) Explain how aggregate demand is likely to be affected by an increase in the money supply
and consider whether the impact of such an increase will be on employment or on the general
price level.
[12]
4
China’s terms of trade index fell from 102.1 in March 2018 to 99.7 in April 2018.
(a) State how the terms of trade are measured, and explain three possible causes of the fall in
China’s terms of trade shown above.
[8]
(b) Discuss whether a rise in the terms of trade or a fall in the terms of trade is more likely to be
of benefit for an economy.
[12]
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Section A
(a) State whether the Malaysian ringgit depreciated or appreciated against the US dollar over the
period July 2013 to July 2017. Justify your answer.
[2]
Answer this question.
(b) (i)
1
Malaysia’s persistent trade surplus
(ii)
Malaysia has the third highest income per head in South East Asia and, in the last six years, has
experienced an average rate of growth approaching 6% per year. It is now a successful ‘newly
industrialised market economy’ with a strong export sector. This strength is seen in its consistent
surplus on its balance of trade in goods and services (see Fig. 1.1).
Explain the reason for this difference.
[2]
[2]
(d) Other than exchange rate changes, explain two possible reasons for Malaysia’s increasing
balance of trade in goods and services surplus from July 2016 to July 2017.
[6]
(e) Discuss whether the Malaysian government should be concerned about persistent surpluses
in its balance of trade in goods and services.
[6]
Despite what appears to be a strong external trade position, the foreign exchange rate of
Malaysia’s currency, the ringgit (RM), against the US dollar has experienced significant change
since 2013 (see Fig. 1.2). Given the importance of trade in goods and services to its economy, any
volatility and uncertainty of the ringgit’s value may well hinder Malaysia in its drive to become a
‘high income economy’.
Section B
Source: adapted from tradingeconomics.com/articles, accessed April 2018
Answer one question.
2
(a) Using diagrams, explain what might cause a market to be in disequilibrium, and how market
forces would lead to equilibrium being restored.
[8]
Jul–17
Apr–17
Jan–17
Jul–16
Oct–16
Apr–16
Jul–15
Oct–15
Jan–16
Apr–15
Jan–15
Jul–14
Oct–14
Apr–14
(b) Discuss whether the incidence of an indirect tax on a product always affects its consumers
more than its producers.
[12]
Jan–14
Jul–13
Oct–13
Explain whether the evidence in Fig. 1.1 and Fig. 1.2 confirms this relationship.
(c) In July 2017, Malaysia’s balance of trade in goods and services was RM22 045 million and its
current account balance was RM9642 million.
In the past, Malaysia’s economy was firmly based on the production of basic raw materials such
as rubber and tin. In more recent years, however, its growing prosperity has come about through
it being a leading exporter of electrical appliances, electronic parts, petroleum and natural gas.
China is its biggest export market, accounting for 16% of total exports in 2016, and a further 11%
of exports go to the European Union (EU). Malaysia’s economy though remains vulnerable to
external shocks like the global financial crisis of 2007–2008, which led to capital outflows.
35 000
30 000
25 000
Balance
20 000
of trade
(RM million) 15 000
10 000
5000
0
Describe the relationship you would expect between a change in the foreign exchange
rate of a country and its balance of trade in goods and services.
[2]
3
(a) Explain what is meant by income elasticity of demand and, with the help of examples, show
how it can be used to determine whether a good is normal or inferior.
[8]
(b) Discuss whether knowledge of price elasticity of demand or price elasticity of supply is more
useful for a car manufacturer.
[12]
Fig. 1.1 Malaysia balance of trade in goods and services, July 2013–July 2017 (RM million)
RM per US dollar
Source: tradingeconomics.com, accessed April 2018
4.6
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
2.8
4
A government embarks on a supply-side policy involving substantial additional funding for new
road schemes and for new training schemes designed to raise labour productivity.
(a) Use an AD/AS diagram to explain the effects of this funding on the level of output in the
economy.
[8]
(b) Discuss the extent to which a supply-side policy involving new road schemes and new training
schemes will increase the rate of inflation in the economy.
[12]
Jul–13
Jan–14
Jul–14
Jan–15
Jul–15
Jan–16
Jul–16
Jan–17
Jul–17
Fig. 1.2 Malaysia/US foreign exchange rate, July 2013–July 2017
Source: US Federal Reserve
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