Cambridge A Level Economics 9708 — 2001 Oct/Nov Paper 2 · Variant 1

TIME 1 hour 30 minutes INSTRUCTIONS TO CANDIDATES Write your name, Centre number and candidate number in the spaces provided on the answer paper/answer booklet. Answer two questions. Write your answers on the separate answer paper provided. If you use more than one sheet of paper, fasten the sheets together. Section A Answer this question. Section B Answer any one question. INFORMATION FOR CANDIDATES The questions in this paper carry equal marks. The number of marks is given in brackets [ ] at the end of each part question. You may answer with reference to your own economy or other economies that you have studied where relevant to the question. CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level ECONOMICS 8708/2 PAPER 2 Data Response and Essay OCTOBER/NOVEMBER SESSION 2001 1 hour 30 minutes Additional materials: Answer paper This question paper consists of 4 printed pages. SB (SC/KN) QK11790/3 © CIE 2001 [Turn over

2 8708/2/O/N/01 Section A The UK’s Balance of Payments 1 Table 1 gives selected details from the UK’s balance of payments for 1998. Table 1 £m £m Trade in goods Export of goods 163 704 Import of goods 184 302 Balance of trade in goods –20 598 Trade in services Export of services 61 777 Import of services 49 099 Balance of trade in services 12 678 Balance of trade in goods and services –7 920 Balance on Current Account 1 470 Fig. 1 shows selected balances for recent years. Fig. 1 –30000 –20000 –10000 0 10000 20000 92 93 94 95 96 97 98 Balance of trade in services Balance on current account Balance of trade in goods £m

3 8708/2/O/N/01 [Turn over Fig. 2 shows the effective exchange rate for Sterling (£) for the same period. Fig. 2 (a) (i) Identify two differences between the UK’s 1998 trade in goods and that in services. [2] (ii) How might these differences be explained? [3] (b) (i) Name one item in the current account which does not arise from trade. [1] (ii) Calculate the contribution of all non-trade items to the balance on current account. [1] (c) (i) Explain how, according to economic theory, a country’s trade position will be affected by an appreciation of its currency. [3] (ii) Comment upon the extent to which this effect is shown in the data. [4] (d) Discuss whether the UK government should introduce a general tariff on imported goods to help its trade position. [6] 1992 93 94 95 96 97 98 80 90 100 110 Sterling exchange rate (1990 = 100)

4 8708/2/O/N/01 Section B Answer one of the following questions. 2 (a) Explain how the market system allocates scarce resources. [8] (b) Discuss when and how a government should intervene in the operation of the price system. [12] 3 (a) Explain the importance of the functions of money to the efficient operation of a modern economy. [8] (b) Discuss the problems of accurately measuring changes in the value of money. [12] 4 (a) Explain the difference between price elasticity of demand and income elasticity of demand. [8] (b) Discuss the value of these concepts to a company in planning its business strategy. [12] Copyright Acknowledgements: Question 1. Table 1, Figs. 1 & 2. The Student’s Economy in Focus 1999/2000. A Anderton, Causeway Press Ltd 1999 (adapted from Economics Trends. Annual Supplement, Monthly Digest of Statistics, Office for National Statistics). Reproduced by permission of Causeway Press Ltd.

CAMBRIDGE INTERNATIONAL EXAMINATIONS NOVEMBER 2001 ADVANCED SUBSIDIARY LEVEL MARK SCHEME SYLLABUS/COMPONENT : 8708/2 ECONOMICS. (DATA RESPONSE AND ESSAY) RR) University of CAMBRIDGE 8) Local Examinations Syndicate

Page 1 of 2 Mark Scheme Syllabus | Paper AS Level Examinations — November 2001 8708 2 a (i) (ii) b (ii) ce (ii) Totals larger (1), deficit not surplus (1), goods deficit > services surplus (1), goods total V, services total 44(1) Any2 [2] Trade in goods easier or more traditional (1), greater comparative advantage in services, explanation of services strength or goods weaknesses (2) [3] Government expenditure, |.P.D., transfers, net property income Any1 [1] £9390m (total sufficient) [1] Worsen (1), export prices rise reducing exports (1), import prices fall increasing imports (1). Credit reverse J curve approach and Marshall-Lerner. [3] For 1996-8 Position for goods worsens confirming (1), position for services improves contradicting (1), current balance worsens after lag (1), comment on relative elasticity or time lag or other relevant points (1). Candidates are likely to consider 1996-8 but 1993 also acceptable. [4] Meaning of tariff (1). In favour: avoid harm to confidence or need to deflate and may raise revenue, cut outflow of currency and boost employment. Against: inflationary, against comparative advantage, ineffective with inelastic demand, breach of trade obligations, deficit covered elsewhere and retaliation possible. Up to (4) marks for clear explanation with (1) more for comment/evaluation. Full marks requires both sides be considered. List = maximum (2). [6] Price mechanism is the centre-piece with demand and supply influences at work, Consumers aim to maximise satisfaction while producers aim at profit maximisation. Changes in demand and supply send signals about resource allocation through price changes. Resources transfer to those areas offering higher rewards and leave those where rewards are falling. The operation depends upon the assumptions of the model. [8] Level 3. Detailed account working through changes with clear assumptions (7-8) Level 2 Understanding of adjustment within system (4-6) Level1 Basic knowledge of the price system (1-3) Governments intervene to correct market failure and promote consumer welfare. Market failure includes externalities, non-provision of public and merit goods, the existence of demerit goods, price instability and the breakdown of competition, others may be suggested. The methods used can include taxation, subsidies, direct provision of goods and service and prohibitions. They can be judged by their effectiveness and drawbacks. (12] Level 3 Analysis of the need for and methods used in government action (9-12) Level 2 Understanding of the link between market failure and relevant policies (5-8) Level 1 Knowledge of the idea of market failure (1-4)

Page 2 of 2 Mark Scheme Syllabus Paper IGCSE Examinations —- November 2001 8708 2 The meaning of money and its functions of medium of exchange, unit of account, store of value and standard of deferred payment link to the ease with which specialisation, trade and long term planning can take place. These contribute to efficiency and higher standards of living found in modern economies. [8] Level3 Explanation of the contribution of the functions of money to operation (7-8) Level 2 Understanding of the functions of money (4-6) Level 1 Knowledge of the concept of money and/or its functions (1-3) Changes are measured by price indices. The problems include their comprehensiveness, the accuracy of weighting, the collection of data, the frequency of changes in data, the effects of quality changes and the suitability for purpose. These can be mitigated by frequent updating, willingness to spend on data collection, a range of alternative measures and appropriate interpretation. Inaccuracy causes problems in interpreting and responding to the current position for individuals, firms and governments. [12] Level 3 Discussion of the problems and their significance (9-12) Level 2 Explanation of the problems (5-8) Level 1 Understanding of the features of a price index (1-4) The concepts relate changes in quantity demanded to own price and income respectively. This can be shown by definition or formula. PED normally has a negative value and YED a positive value reflecting the response to a change in the variable. [8] Level 3 Comparison of the two (7-8) Level 2 Clear understanding of one concept to (5), both to (6) (4-6) Level 1 Basic knowledge of one to (2) or both concepts to (3) (1-3) PED can be used to set pricing policy with reference to the effect upon revenue of price changes. YED might indicate the need for changes in production levels, or products, or markets depending upon positive or negative values. Caution may be needed in using the concepts based on their accuracy, reliability and the ability to predict behaviour. [12] Level 3 Discussion of uses and limitations in application (9-12) Level 2 Explanation of use linked to values of estimates (5-8) Level 1 Identification of the uses of the two concepts (1-4)