Cambridge A Level Economics 9708 — 2009 May/June Paper 2 · Variant 1

Location Entry Codes As part of CIE’s continual commitment to maintaining best practice in assessment, CIE uses different variants of some question papers for our most popular assessments with large and widespread candidature. The question papers are closely related and the relationships between them have been thoroughly established using our assessment expertise. All versions of the paper give assessment of equal standard. The content assessed by the examination papers and the type of questions is unchanged. This change means that for this component there are now two variant Question Papers, Mark Schemes and Principal Examiner’s Reports where previously there was only one. For any individual country, it is intended that only one variant is used. This document contains both variants which will give all Centres access to even more past examination material than is usually the case. The diagram shows the relationship between the Question Papers, Mark Schemes and Principal Examiners’ Reports that are available. Question Paper Mark Scheme Principal Examiner’s Report Introduction Introduction Introduction First variant Question Paper First variant Mark Scheme First variant Principal Examiner’s Report Second variant Question Paper Second variant Mark Scheme Second variant Principal Examiner’s Report Who can I contact for further information on these changes? Please direct any questions about this to CIE’s Customer Services team at: international@cie.org.uk The titles for the variant items should correspond with the table above, so that at the top of the first page of the relevant part of the document and on the header, it has the words: • First variant Question Paper / Mark Scheme / Principal Examiner’s Report or • Second variant Question Paper / Mark Scheme / Principal Examiner’s Report as appropriate.

This document consists of 3 printed pages and 1 blank page. IB09 06_9708_21/4RP © UCLES 2009 [Turn over *6474198444* UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ECONOMICS 9708/21 Paper 2 Data Response and Essay (Core) May/June 2009 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 this 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. First Variant Question Paper

2 © UCLES 2009 9708/21/M/J/09 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$17 billion for 2006, two thirds higher than in 2005. Changes in world copper prices in 2006, a year of global growth, were an important influence on Chile’s trade performance. However, one problem that Chile faced in 2006 was a strike for higher wages and better conditions at Escondida, the world’s largest copper mine, where 8 % of world copper was mined. Figure 1 shows the contribution of copper to Chile’s export revenue and changes in world copper prices. Fig. 1: Chile’s export revenue and world copper prices, 2000-2006 50 40 30 20 10 0 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 copper price US$ thousand per tonne exports US$ billion non-copper exports copper exports copper price key year (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]

3 © UCLES 2009 9708/21/M/J/09 Section B Answer one question. 2 (a) An economy can produce agricultural and industrial goods. Explain the possible effects on its production possibility curve if there is an increase in the productivity of its agricultural workers. [8] (b) Discuss whether a market economy can solve the problem of scarcity more effectively than a command economy. [12] 3 (a) Explain, with the aid of a diagram, how consumer surplus will be affected by the introduction of an indirect tax. [8] (b) Discuss the advantages and disadvantages of using indirect taxes to deal with the negative externalities associated with some products. [12] 4 (a) Explain why there can be problems for an economy if the internal value of its money is unstable. [8] (b) Discuss whether it is possible to construct a consumer price index that is an accurate measure of changes in the cost of living for all households. [12]

4 BLANK PAGE Copyright Acknowledgements: Question 1 Fig. 1 © Central Bank of Chile. 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. 9708/21/M/J/09

This document consists of 3 printed pages and 1 blank page. IB09 06_9708_22/FP © UCLES 2009 [Turn over *8137985321* UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ECONOMICS 9708/22 Paper 2 Data Response and Essay (Core) May/June 2009 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 this 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. Second Variant Question Paper

2 © UCLES 2009 9708/22/M/J/09 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$17 billion for 2006, two thirds higher than in 2005. Changes in world copper prices in 2006, a year of global growth, were an important influence on Chile’s trade performance. However, one problem that Chile faced in 2006 was a strike for higher wages and better conditions at Escondida, the world’s largest copper mine, where 8 % of world copper was mined. Figure 1 shows the contribution of copper to Chile’s export revenue and changes in world copper prices. Fig. 1: Chile’s export revenue and world copper prices, 2000-2006 50 40 30 20 10 0 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 copper price US$ thousand per tonne exports US$ billion non-copper exports copper exports copper price key year (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]

3 © UCLES 2009 9708/22/M/J/09 Section B Answer one question. 2 (a) Explain, with examples and diagrams, the effects of a decrease in incomes on the markets for normal and inferior goods. [8] (b) Economists also classify goods in others ways. Discuss the extent to which an economist would classify a packet of cigarettes and a vaccination against influenza as similar types of good. [12] 3 (a) Explain, with the help of an example, the effects when a government introduces a maximum price for a good or service. [8] (b) With the help of a diagram, discuss how desirable it is for a government to pay subsidies to producers. [12] 4 (a) Explain the ‘infant industry’ and anti-dumping arguments for the introduction of tariffs. [8] (b) Discuss whether trade arrangements, such as the European Union or the South Asian Free Trade Area, encourage or discourage the benefits of free trade. [12]

4 BLANK PAGE Copyright Acknowledgements: Question 1 Fig. 1 © Central Bank of Chile 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. 9708/22/M/J/09

Location Entry Codes As part of CIE’s continual commitment to maintaining best practice in assessment, CIE has begun to use different variants of some question papers for our most popular assessments with extremely large and widespread candidature, The question papers are closely related and the relationships between them have been thoroughly established using our assessment expertise. All versions of the paper give assessment of equal standard. The content assessed by the examination papers and the type of questions are unchanged. This change means that for this component there are now two variant Question Papers, Mark Schemes and Principal Examiner’s Reports where previously there was only one. For any individual country, it is intended that only one variant is used. This document contains both variants which will give all Centres access to even more past examination material than is usually the case. The diagram shows the relationship between the Question Papers, Mark Schemes and Principal Examiner’s Reports. Question Paper Mark Scheme Principal Examiner’s Report Introduction Introduction Introduction First variant Question Paper First variant Mark Scheme First variant Principal Examiner’s Report Second variant Question Paper Second variant Mark Scheme Second variant Principal Examiner’s Report Who can I contact for further information on these changes? Please direct any questions about this to CIE’s Customer Services team at: international@cie.org.uk

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2009 question paper for the guidance of teachers 9708 ECONOMICS 9708/21 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, which would have considered the acceptability of alternative answers. 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 May/June 2009 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses. First variant Mark Scheme

Page 2 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – May/June 2009 9708 21 © UCLES 2009 1 (a) (i) Compare the price of copper in the middle of 2003 and the middle of 2006. [2] Higher in 2006 (1), 4 fold (1) or by $6000 per tonne (1) or by 300% (1) (ii) Explain one change in demand and one change in supply that might have caused this movement in the price of copper. [4] Demand increased (1) increasing global growth, new uses, dearer alternatives (1) Supply decreased (1), strike action, resource exhaustion, rising production costs (1) Accept other valid influences. (b) (i) Calculate Chile’s approximate visible trade balance in 2005. [2] Surplus (1), $10 billion (1) (ii) What information in addition to that in Fig.1 would be required to calculate Chile’s current account balance in 2006? [4] Visible import figures, service figures, income flows, current transfers. 1 mark per item to max (4). (c) (i) How did the importance of copper as part of Chile’s exports change between 2002 and 2005? [2] Increased (1), from under to over 50% (1) or from approx 40% to 60% of total (1) (c) (ii) Discuss whether it is desirable for a country to specialise in the production and export of a single good. [6] Benefits of specialisation include comparative advantage, increased output and efficiency, international competitiveness, reduced unit costs. Disadvantages include restricted job opportunities, vulnerability to changes in price, competition and technology, need to import, resource depletion. One side to maximum of four marks. 2 (a) An economy can produce agricultural and industrial goods. Explain the possible effects on its production possibility curve if there is an increase in the productivity of its agricultural workers. [8] A ppc shows an economy’s maximum output of two goods when using all of its resources. Productivity is the measure of output per worker. Assuming the production of agricultural goods and industrial goods, the ppc would be expected to pivot outwards, as workers produce more, indicating greater quantities of agricultural goods. Further possibilities include greater production of industrial goods as well because better food supplies increase overall productivity or as restriction on agricultural total output shifts resources to industrial production, which in turn expands. For knowledge of ppc and productivity up to 2 marks For understanding of pivot with more agricultural output up to 4 marks For explanation of alternative outcomes up to 2 marks First variant Mark Scheme

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – May/June 2009 9708 21 © UCLES 2009 (b) Discuss whether a market economy can solve the problem of scarcity more effectively than a command economy. [12] A market economy involves minimal government intervention and relies on private motives and ownership. A command economy is directed by the government with public motivation. Scarcity occurs when there is insufficient output to meet peoples’ wants at zero price. Scarcity arises because of limited resources and unlimited wants and is shown by the area outside of a ppc. The market economy may appear to reduce the extent of scarcity more by operating efficiently and improving the supply of goods and services, however the wants of consumers expand as more basic needs are satisfied so scarcity remains. The command economy has achieved lower living standards but with a more even distribution. Economic systems are unlikely ever to remove the problem of scarcity, although its nature may differ under different systems. For understanding of the economic systems and scarcity up to 4 marks For analysis of the ability of each to reduce scarcity up to 6 marks For discussion of the meaning and solution of scarcity up to 6 marks 3 (a) Explain, with the aid of a diagram, how consumer surplus will be affected by the introduction of an indirect tax. [8] Consumer surplus is the excess the consumer is prepared to pay over the amount actually paid for a good and is shown by the area between the demand curve and price line. An indirect tax is levied on a good and will usually raise the price of a good and reduce the quantity demanded by shifting the supply curve to the left. The result will be a reduction in consumer surplus as a result of the reduced consumption and higher price. The effect will depend upon the price elasticities involved. For knowledge of consumer surplus up to 2 marks For a labelled diagram showing impact of indirect tax up to 4 marks For explaining a reduction in consumer surplus up to 2 marks (b) Discuss the advantages and disadvantages of using indirect taxes to deal with the negative externalities associated with some products. [12] Negative externalities from production and consumption are harmful third party effects, which include pollution and environmental destruction. They make social cost > private cost. They result in the overproduction of goods which sell at a lower price than is optimal. A tax would internalise the externality, reduce output, allow the market to operate, act as an incentive to cut costs and also raise revenue for the government. However it might be difficult to measure the harm done, to set the correct rate which might need to be individual to each firm, would have administrative costs and would be inflationary and regressive. For understanding of the effect of negative externalities up to 4 marks For analysis of the operation of a tax up to 6 marks For discussion of the impact of a tax up to 6 marks to max 10 marks to max 10 marks First variant Mark Scheme

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – May/June 2009 9708 21 © UCLES 2009 4 (a) Explain why there can be problems for an economy if the internal value of its money is unstable. [8] Money is anything generally acceptable as a means of payment and fulfils four functions. It will not fulfil these effectively if its value is unstable. Consequences will include obstacles to trading, problems for producers in planning output and for consumers in judging purchases, instability in foreign trade, saving and tax revenues. Economic progress and greater welfare require an efficient and stable system of exchange. For knowledge of money and its functions up to 2 marks For explanation of the impact on economic variables up to 6 marks (b) Discuss whether it is possible to construct a consumer price index that is an accurate measure of changes in the cost of living for all households [12] CPI measures the rate of inflation or changes in the cost of living. It is constructed by selecting a basket of goods, allotting the items weights and sampling at different times outlets through which they are sold. Changes in the price level can then be calculated. Although this is done accurately it may not reflect the change in prices faced by all citizens. This will depend on the composition of the basket of goods, the weighting given to each item, how frequently values are taken and the range of outlets used. Some groups have spending patterns which differ from the average because of income and wealth levels and attitudes. Pensioners are an often quoted case, but house owners and young people might also not be representative. For understanding the construction of CPI up to 4 marks For analysis of areas of possible inaccuracy up to 6 marks For discussion of spending patterns of different households up to 6 marks to max 10 marks First variant Mark Scheme

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2009 question paper for the guidance of teachers 9708 ECONOMICS 9708/22 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, which would have considered the acceptability of alternative answers. 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 May/June 2009 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses. Second variant Mark Scheme

Page 2 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – May/June 2009 9708 22 © UCLES 2009 1 (a) (i) Compare the price of copper in the middle of 2003 and the middle of 2006. [2] Higher in 2006 (1), 4 fold (1) or by $6000 per tonne (1) or by 300% (1) (ii) Explain one change in demand and one change in supply that might have caused this movement in the price of copper. [4] Demand increased (1) increasing global growth, new uses, dearer alternatives (1) Supply decreased (1), strike action, resource exhaustion, rising production costs (1) Accept other valid influences. (b) (i) Calculate Chile’s approximate visible trade balance in 2005. [2] Surplus (1), $10 billion (1) (ii) What information in addition to that in Fig.1 would be required to calculate Chile’s current account balance in 2006? [4] Visible import figures, service figures, income flows, current transfers. 1 mark per item to max (4). (c) (i) How did the importance of copper as part of Chile’s exports change between 2002 and 2005? [2] Increased (1), from under to over 50% (1) or from approx 40% to 60% of total (1) (c) (ii) Discuss whether it is desirable for a country to specialise in the production and export of a single good. [6] Benefits of specialisation include comparative advantage, increased output and efficiency, international competitiveness, reduced unit costs. Disadvantages include restricted job opportunities, vulnerability to changes in price, competition and technology, need to import, resource depletion. One side to maximum of four marks. 2 (a) Explain, with examples and diagrams, the effects of a decrease in incomes on the markets for normal and inferior goods. [8] Normal goods have positive YED while inferior goods have negative YED. Examples might be eating out and public transport respectively but may vary between economies. A decrease in demand for normal goods would lower demand (curve shifts to left) causing a lower price and reduced quantity traded. For inferior goods demand would rise (curve shifts to right) price would rise and quantity traded increase. Definitions and examples up to 4 marks Diagrams with outcomes up to 4 marks Second variant Mark Scheme

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – May/June 2009 9708 22 © UCLES 2009 (b) Discuss the extent to which an economist would classify a packet of cigarettes and a vaccination against influenza as similar types of good. [12] Both products are private goods. They are rivalrous and excludable so can be supplied by the market. In this way they can be classified together. Cigarettes produce negative externalities (e.g. passive smoking) and are over-consumed. They are sometimes referred to as demerit goods on the basis of inadequate information for the consumer. Influenza vaccinations possess positive externalities (they help to prevent the transmission of disease to others) and may be under-consumed. They may be considered merit goods on the basis of insufficient information. In this case the products are classified differently. Understanding of classifications up to 4 marks Discussion of common classification up to 6 marks Discussion of different classification up to 6 marks 3 (a) Explain, with the help of an example, the effects when a government introduces a maximum price for a good or service. [8] Maximum prices cannot be exceeded and are set below the market price, e.g. rents and fuel. They act as a ceiling price. Quantity demanded will exceed quantity supplied and a shortage will result. A system for allocation will be needed. This might be rationing or queues. A black market may develop and the intention of helping the poorest may be thwarted. Home rental market is a frequently used example. This may be illustrated by a diagram. Understanding of a maximum price up to 2 marks Explanation of outcomes up to 6 marks (b) With the help of a diagram, discuss how desirable it is for a government to pay subsidies to producers. [12] A subsidy will reduce the cost of production and shift the supply curve to the right. This will reduce price and increase quantity traded. The degree to which price falls will depend upon the elasticities involved. The consumer will benefit from lower prices and producers will gain higher incomes. It is also a way to increase the production of goods with external benefits which will improve welfare. This can be shown in a diagram. Problems arise because the expenditure will have an opportunity cost, might involve increased taxation and may contradict the efficiency of the market outcome. Analysis of impact of subsidy with diagram up to 4 marks Discussion of benefits up to 6 marks Discussion of drawbacks up to 6 marks to max 10 marks to max 10 marks Second variant Mark Scheme

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – May/June 2009 9708 22 © UCLES 2009 4 (a) Explain the ‘infant industry’ and anti-dumping arguments for the introduction of tariffs. [8] An infant industry is one which has a potential comparative advantage. Currently it is too small to gain economies of scale and too young to have trading experience. A tariff will allow time to grow and become efficient, at which point the tariff will be removed. Dumping is the selling of goods below the cost of production, possibly due to government support, it may lead to monopolisation of the market. This is deemed unfair competition and restriction of free trade so can be offset by a tariff. Meaning of a tariff up to 2 marks Explanation of infant industry argument up to 3 marks Explanation of anti-dumping argument up to 3 marks (b) Discuss whether trade arrangements, such as the European Union and the South Asian Free Trade Area, encourage or discourage the benefits of free trade. [12] Free trade encourages competition and efficiency, lowers prices, increases choice and raises living standards. Trade arrangements may vary from relatively loose free trade areas to very structured economic unions. The effects of membership involve trade creation and trade diversion. As a member a country would hope to benefit although this may involve the need for restructuring with short-term costs. The number of trading arrangements has been increasing so extending the benefits. For non- members there is reduced opportunity to experience free trade and its benefits although some countries may feel that the benefits of free trade are not shared equally among participants and may undermine domestic industries and employment. Understanding of the types of trade arrangement up to 4 marks Discussion of the benefits of trade up to 6 marks Discussion of the drawbacks of trade arrangements up to 6 marks to max 10 marks Second variant Mark Scheme