Cambridge A Level Economics 9708 — 2004 Oct/Nov Paper 2 · Variant 1

This document consists of 3 printed pages and 1 blank page. SP (CW) S58057/2 © UCLES 2004 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ECONOMICS 9708/02 Paper 2 Data Response and Essay (Core) October/November 2004 1 hour 30 minutes Additional Materials: Answer Booklet/Paper READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer this question. Brief answers only are required. Section B Answer any one question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. You may answer with reference to your own economy or other economies that you have studied where relevant to the question.

2 9708/02/O/N/04 © UCLES 2004 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 labour- intensive, 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 (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] Japan China Population (millions) 126 1,260 Gross Domestic Product (GDP) (US$bn) 4,753 1,099 Consumer price inflation % –0.7 0.4 Average annual % inflation rate in previous 10 years 0.8 7.1 Current account balance (US$bn) 116.9 10.2 Current account balance as % of GDP 2.5 0.9 Exports of goods (US$bn) 459 249 Imports of goods (US$bn) 343 216

3 © UCLES 2004 9708/02/O/N/04 Section B Answer one question. 2 (a) Explain how inflation affects the functions of money. [8] (b) Discuss the view that inflation is always a major problem. [12] 3 (a) Explain the difference between elastic, inelastic and fixed supply. [8] (b) Discuss whether the elasticity of supply of manufactured goods is likely to be greater than the elasticity of supply of agricultural goods. [12] 4 (a) Explain the meaning of ‘public good’ and ‘private good’. [8] (b) Discuss whether economic actions by individuals always result in a net benefit to society. [12]

4 9708/02/O/N/04 BLANK PAGE Copyright Acknowledgements: Question 1. Article ‘Stalled Japan Hitches Itself to Surging China’ by Michael Sheridan. © The Sunday Times 16th June 2002. http://www.sunday-times.co.uk The University of Cambridge Local Examinations Syndicate has made every effort to trace copyright holders, but if we have inadvertently overlooked any we will be pleased to make the necessary arrangements at the first opportunity. University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES) which is itself a department of the University of Cambridge.

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary and Advanced Level MARK SCHEME for the November 2004 question papers 9708 ECONOMICS 9708/02 Paper 2 Data Response and Essay (Core), maximum raw mark 40 This mark scheme is published as an aid to teachers and students, to indicate the requirements of the examination. It shows the basis on which Examiners were initially instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began. Any substantial changes to the mark scheme that arose from these discussions will be recorded in the published Report on the Examination. All Examiners are instructed that alternative correct answers and unexpected approaches in candidates’ scripts must be given marks that fairly reflect the relevant knowledge and skills demonstrated. Mark schemes must be read in conjunction with the question papers and the Report on the Examination. • CIE will not enter into discussion or correspondence in connection with these mark schemes. CIE is publishing the mark schemes for the November 2004 question papers for most IGCSE and GCE Advanced Level syllabuses.

Grade thresholds taken for Syllabus 9708 (Economics) in the November 2004 examination. minimum mark required for grade: maximum mark available A B E Component 2 40 26 23 16 The thresholds (minimum marks) for Grades C and D are normally set by dividing the mark range between the B and the E thresholds into three. For example, if the difference between the B and the E threshold is 24 marks, the C threshold is set 8 marks below the B threshold and the D threshold is set another 8 marks down. If dividing the interval by three results in a fraction of a mark, then the threshold is normally rounded down.

November 2004 GCE AS/A LEVEL MARK SCHEME MAXIMUM MARK: 40 SYLLABUS/COMPONENT: 9708/02 ECONOMICS Paper 2 Data Response and Essay (Core)

Page 1 Mark Scheme Syllabus Paper GCE AS/A LEVEL – NOVEMBER 2004 9708 2 © University of Cambridge International Examinations 2005 1 (a) Suggest two steps a country might take to open its economy to freer international trade (2) Import approach: reduction of tariffs (1), abolition of quotas (1), reduction of subsidies (1), agreement to rules on trade in services, GATS (1), join WTO, FTA, EU (1) Export approach: raise productivity (1), provide information (1) Inward capital approach: tax concessions to mncs (1), improved infrastructure (1) Any two possibilities showing removal of obstacle to trade. (b) (i) Explain why the comparative advantage of Japan and China differs (4) Japan's is based on high technology (1), this is the result of advanced methods/knowledge/history (1), China's is based on low labour costs (1) this is the result of population size/economic development/history (1) (ii) Compare the importance of international trade to the two countries. (4) Data approach: Total trade is more important to Japan in total value (1), $802bn v. $465bn (1) but bigger for China as a % of GDP(1) 42% v. 16% (1), current account surplus for both countries (1), this is larger in value for Japan (1) visible surplus smaller for Japan as % of GDP(1) 2.5% v. 3%(1). Any two points with supporting evidence or 4 identifications Applied approach: general benefit of trade (1), Different types of benefit up to 2 marks Comment reflecting the different positions of the two countries up to 4 marks (c) Comment on the inflation figures for the two countries (4) Japan's is lower (1), for both periods (1), Japans price level is falling, deflation (1), both are lower in 2000 than their 10 year average (1), China's has fallen more (1), both are relatively low (1). Any 4 valid observations or 2 observations with comment on significance.

Page 2 Mark Scheme Syllabus Paper GCE AS/A LEVEL – NOVEMBER 2004 9708 2 © University of Cambridge International Examinations 2005 (d) Discuss whether China offers an economic threat or opportunity to Japan. (6) Opportunities It provides a market for exports to boost employment, a cheap source of imports to cut the cost of living, an opportunity to invest abroad to maintain competitiveness and yield income, potential competition to spur efficiency and an economy that might be complementary to Japan's. Threats The outflow of investment may cut Japanese employment and reduce domestic investment, cheap imports may cost Japanese jobs, future development of technology may make China a serious long-run competitor in high tech products. Max four for each side with 2 additional points for judgement to a max of 6 2 (a) Explain how inflation affects the functions of money. [8] Inflation is a sustained rise in the general price level. Money serves as a medium of exchange, a unit of account, a store of wealth and a standard of deferred payment. Inflation will undermine these functions. Fast changing prices affect it as a unit of account and a store of wealth, while hyper- inflation may lead to barter. The extent may depend upon the rate of inflation. The impact may be more immediate upon the wealth and deferred payment functions as real values fall. Knowledge of the terms up to 3 marks Explanation of the functions and effects up to 5 marks (b) Discuss the view that inflation is always a major problem. [12] Inflation is a problem because of its effects on the efficient operation of the market system, international competitiveness, economic confidence and the distribution of income. Hyper-inflation can destroy an economy. Inflation may produce deflationary action from government and T.U. action to protect real incomes. It is not always a major problem, this depends upon its absolute and relative level, whether it is anticipated or unanticipated and whether it is controllable. Recent experience suggests that inflation is no longer the problem it was and that deflation may be a concern. Knowledge of the effects of inflation up to 4 marks Explanation of the harmful effects of inflation up to 4 marks Discussion of benign inflationary situation up to 4 marks

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – NOVEMBER 2004 9708 2 © University of Cambridge International Examinations 2005 3 (a) Explain the difference between elastic, inelastic and fixed supply. [8] Elasticity of supply measures the responsiveness of quantity supplied to changes in price and is measured by the elasticity formula. The three cases relate to values >1, <1 and 0 reflecting the degree of change. The values can be shown by the nature of the supply curve. Knowledge of the definition and formula up to 3 marks Understanding of the values up to 3 marks Illustration of the different values up to 2 marks (b) Discuss whether the elasticity of supply of manufactured goods is likely to be greater than the elasticity of supply of agricultural goods. [12] Elasticity of supply is influenced by levels of stocks, excess capacity, ease of entry to the industry, mobility of factors, the length of the production process and the time period involved. For farming it may be more difficult to hold stocks, less easy to enter the industry, take longer to carry out production and bring excess capacity into play. This suggests that supply may be more inelastic in agriculture. The nature of the product may make supply equally inelastic for some manufacturing. Knowledge of the influences on elasticity up to 3 marks Explanation of the operation of the influences on elasticity up to 3 marks Discussion of the two different industries up to 6 marks 4 (a) Explain the meaning of public good and private good. [8] A private good once used by one consumer or firm is not available to others. This covers most consumer and capital goods. Public goods have non-rivalry and non-excludability so may encounter the ‘free rider’ problem. Private goods can be supplied for profit by the market system while public goods, such as defence and street lighting, are provided by the government and funded through taxation. General comment 1 mark Example 1 mark (X2) Explanation of the nature up to 2 marks (b) Discuss whether economic actions by individuals always result in a net benefit to society. [12] Actions by individuals should be in their own interests and maximise their own benefit. This may contribute to maximisation of benefit to society through the incentives of the market system. The government has a role in promoting social welfare. Actions with positive externalities give a greater benefit to society than to the individual. Some actions may have harmful side-effects or negative externalities which make the cost to society greater than to the individual. Producers may be unwilling to supply some goods and services e.g. merit and public goods which society values. Understanding of private motivation and public interest up to 4 marks Analysis of the benefits of individual actions up to 4 marks Discussion of the harm of individual actions up to 4 marks