Cambridge A Level Economics 9708 — 2007 Oct/Nov Paper 2 · Variant 1

This document consists of 3 printed pages and 1 blank page. IB07 11_9708_02/4RP © UCLES 2007 [Turn over *4635053369* 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 2007 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. 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 the question. Brief answers only are required. Section B Answer any one question. You may answer with reference to your own economy or other economies that you have studied where relevant to the 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.

2 © UCLES 2007 9708/02/O/N/07 Section A Answer this question. 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. % 1 0 –1 –2 –3 –4 –5 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 surplus deficit euro stronger / US$ weaker US$ stronger / euro weaker 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 1980 1982 1984 1986 1988 1990 1994 1998 1992 1996 2000 2002 US$ / euro Fig. 1 US current account balance as % of GDP 1980 to 2002 Fig. 2 US$ exchange rate against the euro 1980 to 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.

3 © UCLES 2007 9708/02/O/N/07 (a) (i) Summarise the performance of the US current account balance between 1980 and 2002. [2] (ii) Explain how the US might have been able to finance the current account position that it faced between 1992 and 2002. [3] (b) Suppose a country has a surplus on its current account. Explain how this might affect its exchange rate. [3] (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] (d) Discuss whether a government should try to fix its country’s exchange rate. [6] Section B Answer one question. 2 (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] 3 (a) Explain how resources are allocated in a market economy. [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] 4 (a) Explain, with examples, why labour productivity might vary between countries. [8] (b) Unemployment can be measured by the claimant count or the labour force survey. Discuss the relative reliability of these two measures. [12]

4 BLANK PAGE Copyright Acknowledgements: Question 1 Fig. 1 & Fig. 2 © The Sunday Times, 25 May 2003 www.timesonline.co.uk Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge. 9708/02/O/N/07

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the October/November 2007 question paper 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 candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began. 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 discussions or correspondence in connection with these mark schemes. CIE is publishing the mark schemes for the October/November 2007 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

Page 2 Mark Scheme Syllabus Paper GCE A/AS LEVEL – October/November 2007 9708 02 © UCLES 2007 1 (a) (i) Summarise the performance of the US current account balance between 1980 and 2002. [2] Mostly in deficit (1), only 3 surplus years (1), cyclical/volatile pattern (1), detail of cycle (1), any 2 points. (ii) Explain how the US might have been able to finance the current account position it faced between 1992 and 2002. [3] A worsening deficit needs extra funds (1), can come from capital, financial inflows (1), borrowing (1), use of reserves (1) – recognition of position (1), explanation of sources (2). (b) Suppose a country has a surplus on its current account. Explain how this may affect its exchange rate. [3] Fall in supply of domestic currency to buy imports (1), rise in demand for domestic currency from sale of exports (1), S and D changes cause exchange rate to appreciate (1). (c) (i) Outline how a depreciation of a country’s exchange rate may affect its current account balance. [3] Cheaper exports raise revenue (1), dearer imports cut expenditure (1), current account improves (1), credit Marshall Lerner (1) and J curve (1), to max 3 marks. (ii) Use Fig 1 and Fig 2 to analyse whether this expected effect of an exchange rate depreciation occurred for the US between 1980 and 2002. [3] Support: broadly weaker $ coincided with improving current account 1987-91 (2), weak values gave surplus 1980/1 and 1991 (2) but possible time lag (1), exceptions e.g. 1985-7, 1992, 2002 (1), to max 3 marks. (c) Discuss whether a government should try to fix its foreign exchange rate. [6] for: e.g. stability to encourage trade and investment, own priorities e.g. exports from undervaluation, encourages responsible domestic policy. against: e.g. resists market pressures, requires reserves, deflationary policies, inappropriate value set. 1 side to max 4 marks, a well explained argument up to 2 marks.

Page 3 Mark Scheme Syllabus Paper GCE A/AS LEVEL – October/November 2007 9708 02 © UCLES 2007 2 (a) Explain how an equilibrium price for a product is established in the market and how it may change. [8] Equilibrium is when D=S and there is no tendency to change. Disequilibrium positions (QD more or less than QS) are corrected by responses of consumer and producer, which alter price. New equilibriums are created when changes in conditions cause shifts in D and S. This may be shown with diagrams. Knowledge of equilibrium 2 marks Correction of disequilibriums 3 marks Setting of new equilibriums 3 marks (b) Discuss whether or not 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] PED and YED measure the responsiveness of demand to changes in those variables. Highly elastic means a significantly more than proportionate response (greater than 1). Highly elastic PED means increased revenue with price cuts and decreased revenue with price rises. The outcome depends upon pricing policy and the nature of the product e.g. substitutes. Highly elastic YED means more than proportionate increase when incomes rise (prosperity) but more than proportionate fall with falling incomes (recession). The nature of the product, normal/inferior and economic conditions will determine YED outcome. Understanding of PED, YED and highly elastic 4 marks Discussion of PED case 4 marks Discussion of YED case 4 marks 3 (a) Explain how resources are allocated in a market economy. [8] Market economy means free market forces and limited government. Resources are the factors of production. The actions of producers, consumers and factor owners influence operation of market as they follow maximising behaviour. Demand and supply set price so influencing profits and affordability, which determines the employment of factors between alternative activities. Knowledge of market and factors of production 3 marks Understanding of motives 2 marks Explanation of link to factors 3 marks (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] An indirect tax e.g. VAT, GST shifts the S curve to the left with the tax incidence split between the consumer and producer, depending on the PED and PES. The consumer will pay a higher price and purchase less, the producer will receive less company income and supply less. Different elasticities of demand and supply will cause the burden to split differently between the consumer and producer. Meaning and diagram effect of indirect tax 4 marks Analysis of the impact on two groups 4 marks Discussion of the different share of tax burden 4 marks

Page 4 Mark Scheme Syllabus Paper GCE A/AS LEVEL – October/November 2007 9708 02 © UCLES 2007 4 (a) Explain, with examples, why labour productivity might vary between countries. [8] Labour productivity is output per worker (total output/workers) or per hour. It depends upon the amount and quality of capital, skill, education, supporting infrastructure, technology and attitudes. More developed economies e.g. Japan, with skilled labour forces, automated systems and efficient equipment will be more productive than developing economies e.g. Bangladesh relying on manpower with limited quantities of other productive factors. Meaning of productivity 2 marks Understanding of influences on productivity 3 marks Explanation of examples 3 marks (b) Unemployment can be measured by the claimant count or the labour force survey. Discuss the relative reliability of these two measures. [12] Claimant count identifies those who receive unemployment benefit. The labour force survey is a return from a sample of those who are available for and seeking work while currently without work. This is the ILO definition. Claimant may include those not unemployed (fraudulent) and miss those unemployed (not entitled to benefits) and would give an unreliable result, although it is cheap and quick to calculate. Benefits may not be equally available between countries. LFS may include some of the groups missed by the claimant and gives international comparability. It is more expensive if done properly and may be subject to sampling errors but is thought to be more accurate. Understanding of the two methods 4 marks Discussion of claimant method 4 marks Discussion of LFS 4 marks