Cambridge A Level Economics 9708 — 2009 Oct/Nov Paper 2 · Variant 2

This document consists of 3 printed pages and 1 blank page. IB09 11_9708_22/5RP © UCLES 2009 [Turn over *1121636815* 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) October/November 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.

2 © UCLES 2009 9708/22/O/N/09 Section A Answer this question. 1 World Food Prices 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). Fig. 1 IMF World Food Prices Indices 1975-2007 (2000=100) 1975 1980 1985 1990 1995 2007 2000 300 200 100 0 real prices nominal prices 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. Table 1: Weight given to food (%) in CPI 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.

3 © UCLES 2009 9708/22/O/N/09 (a) (i) What is meant by nominal prices and real prices? [2] (ii) Compare what happened to nominal food prices and real food prices before and after the year 2000. [3] (b) (i) How might the differences in food weights shown in Table 1 be explained? [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] (c) Explain one possible reason for the responsiveness of world food supply to changes in price reported by the IFPRI. [4] (d) Discuss the benefits and drawbacks of rising world food prices. [6] Section B Answer one question. 2 (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] 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]

4 BLANK PAGE Copyright Acknowledgements: Fig. 1 Table 1 © Food Prices, Cheap No More; The Economist; 8/12/2007. © Mercer-Blackman et al; Biofuel demand pushes up food prices - Chart 2; IMF Survey Magazine; 17/12/07. 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/O/N/09

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the October/November 2009 question paper for the guidance of teachers 9708 ECONOMICS 9708/22 Paper 22 (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 October/November 2009 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

Page 2 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – October/November 2009 9708 22 © UCLES 2009 1 (a) (i) What is meant by nominal prices and real prices? [2] Nominal relates to the selling/market price (1), real relates to quantities or inflation adjusted value (1) (ii) Compare what happened to nominal food prices and real food prices before and after the year 2000. [3] Before: real price index declined, nominal more stable (1), indices moved closer together (1) After: real and nominal prices moved more closely together (1), real and nominal prices rose (1), indices moved in similar manner (1), three points covering before and after (b) (i) How might the differences in food weights, shown in Table 1, be explained? [3] Low income countries have higher weights (1), food necessity taking much of income (1), higher incomes afford non-food, more luxury expenditure (1), food prices may vary between countries (1) Any 3 points (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] Greater effect in Kenya (1), Kenya 5 times as large (2), Kenya 10%, UK 2% rise (2) (c) Explain one possible reason for the responsiveness of world food supply to changes in price reported by the IFPRI. [4] PES meaning or formula (1), inelastic supply or 0.1 to 0.2 (1), one from growing period, storage problems, limited resources identification (1), explanation (2) (d) Discuss the benefits and drawbacks of rising world food prices. [6] Rising food prices will help producers, farmers and rural areas, will stimulate food production and help those countries which export food. They will hurt low income earners, food importers and food processors and contribute to inflationary pressure. The poorest subsistence farmers who buy additional food will be hurt. The effects differ according to the production pattern and level of income of countries and individuals. One side 4 marks max. Meaningful conclusion (1) 2 (a) With the aid of a diagram, explain how a government subsidy to fuel producers will affect the producers and government expenditure. [8] A subsidy will lower costs and shift the supply curve to the right and the outcome will be more traded at a lower market price. Producer revenue made up of price and subsidy will increase. Government expenditure will increase by the amount of the subsidy times the new quantity traded. Diagram of impact on market 4 marks Explanation of effect on producer 2 marks Explanation of effect on government expenditure 2 marks

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – October/November 2009 9708 22 © UCLES 2009 (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] Within the air travel market a sub-market may emerge with increased supply of services, lower prices and a restricted service. Former rivals may be able to maintain their position with different customers or may respond by cutting their own price. The size of the market should expand with more people able to afford flying. Rivals such as ferry services or railways may face falling demand, depending upon the elasticity involved. Providers of complementary services e.g. airport parking, travel insurance may face increased demand with upward pressure on their prices. Aircraft manufacturers or leasers may benefit as theirs is a derived demand arising from more flying. Understanding of the impact on market for air travel 4 marks Discussion of rival transport market effects 4 marks Discussion of complementary market effects 4 marks 3 (a) Explain why a lighthouse is often given as an example of a public good while a light bulb is not. [8] Public goods have the characteristics of non-rivalry and non-excludability. The use by one ship of the lighthouse signal does not reduce the consumption of other ships. Once a lighthouse is indicating hazard to one ship it cannot stop other ships from being warned and it is not possible to exclude other ships from gaining the benefit. This means that charging for the service is not possible as free riders would be able to benefit. A light bulb is a private good as it can be charged for when sold (excludable) and its use within one person’s home prevents others from benefiting (rival). The concept of non-rejectability may also be applied. Understanding of non-rival and non-excludable 4 marks Explanation of lighthouse as public good 2 marks Explanation of light bulb as private/non public good 2 marks (b) Discuss whether it is likely that the private costs and the social costs of production would be identical. [12] Private costs are borne by the producer who benefits from the action. They may include raw material costs, wages and energy payments. Social costs are the total costs to those directly involved in the activity and to the rest of society (third parties) as well. Social costs include external costs or spillover effects borne by members of society who do not benefit from the action. Various forms of pollution come within this category. Private costs and social costs will only be identical if there are no external costs. Some actions from transport (e.g. road) and production of manufactures (e.g. chemicals) and provision of services (tourism) may have negative externalities. Private cost may be greater than social when there is an external benefit in production such as research and development effects. However while some output may generate few externalities it is unlikely that they produce none and it would not be the case for total production within an economy. Understanding of the link between private, external and social costs 4 marks Discussion of the existence of externalities 6 marks Comment on the existence of zero externalities 2 marks

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE A/AS LEVEL – October/November 2009 9708 22 © UCLES 2009 4 (a) Compare the aims and features of a free trade area with those of an economic union. [8] A free trade area aims to achieve free trade between it members by the abolition of internal barriers but the retention of individually set barriers to non-members. There is no integration beyond this. An economic union aims at major integration, includes a common external tariff, free movement of factors of production, harmonisation of economic policies and taxes and a common currency. This involves the loss of national sovereignty. The latter is a more comprehensive and ambitious project. Explanation of a free trade area 4 marks Explanation of economic union 4 marks (b) Discuss whether an improvement in a country’s terms of trade always works to its benefit. [12] The terms of trade measure the average price of a country’s exports against the average price of its imports. This is presented as an index number. A rise in export prices relative to import prices is said to be favourable and may arise from a number of different changes in the two components. This gives the ability to purchase more imports with a given quantity of exports. This may help to raise living standards. The changes in prices may not be favourable from a trade balance perspective. Higher export prices and lower import prices will help more if the goods involved have inelastic demand as net revenue should increase. Elastic demand will worsen the position. Understanding of measurement of changes in terms of trade 4 marks Discussion of favourable outcomes 4 marks Discussion of unfavourable outcomes 4 marks