Cambridge A Level Economics 9708 — 2011 May/June Paper 2 · Variant 2

This document consists of 3 printed pages and 1 blank page. DC CB (SE) 34433/2 © UCLES 2011 [Turn over 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 2011 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. * 1 9 9 0 7 9 5 8 9 0 *

2 9708/22/M/J/11 © UCLES 2011 Section A Answer this question. 1 Australia and its Northern Territory The Northern Territory of Australia is a large, sparsely populated area. It relies heavily on tourism, mining, agriculture and fishing. The extraction of oil and gas and the mining of iron ore and bauxite have grown significantly in recent years. Its manufacturing is principally based on the processing of its natural resources. The Northern Territory government publishes forecasts, which compare the economic prospects of the Northern Territory with those of Australia as a whole. The table below gives extracts from the forecasts in January 2009. Table 1: Selected economic forecasts for Northern Territory and Australia Northern Territory Australia 2008–9 2012–13 2008–9 2012–13 International exports, constant price (A$*m) 4172 6004 176 010 236 824 International imports, constant price (A$m) 2718 2811 217 675 224 521 Consumer price index, 1989–90 = 100 164.6 180.0 167.7 186.4 Average weekly nominal earnings, A$ 954 1078 916 1050 Unemployment rate (%) 3.7 5.7 4.2 6.5 Population aged 15–64 (thousands) 170 186 17 456 18 627 * A$ = Australian dollars (a) (i) Calculate and compare the change in the trade balance between 2008–9 and 2012–13 of the Northern Territory with that of Australia. [4] (ii) Explain why exports and imports are often measured at constant prices. [2] (b) Explain two additional pieces of information that would be useful in judging Australia’s international financial position. [4] (c) Analyse the change in average weekly earnings in Australia in real terms between 2008–9 and 2012–13. [4] (d) With the help of the text and the table, discuss the economic outlook for the Northern Territory. [6]

3 9708/22/M/J/11 © UCLES 2011 Section B Answer one question. 2 (a) Explain the role that a government should fulfil in a mixed economy. [8] (b) Discuss the accuracy of the definition of public and merit goods as ‘goods that must be provided by the government’. [12] 3 (a) Using economic analysis, explain the possible causes of the increase in the sales of electronic goods, such as mp3 players, in recent years. [8] (b) Suggest two possible reasons why a government might increase the indirect tax on such goods and discuss, in light of these reasons, the likely effectiveness of such a policy. [12] 4 (a) Explain why the successful operation of the division of labour depends upon the use of money. [8] (b) Discuss whether it is the behaviour of producers, consumers or governments that is most likely to cause inflation. [12]

4 9708/22/M/J/11 © UCLES 2011 BLANK PAGE Copyright Acknowledgements: Question 1 © Access Economics; www.nt.gov.au/economics/publications/economic_briefs/access_decqtr08.pdf; December 2008. 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.

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2011 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. • Cambridge will not enter into discussions or correspondence in connection with these mark schemes. Cambridge is publishing the mark schemes for the May/June 2011 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 AS/A LEVEL – May/June 2011 9708 22 © University of Cambridge International Examinations 2011 1 (a) (i) Calculate and compare the change in the trade balance between 2008–9 and 2012–13 of the Northern Territory with that of Australia. [4] Both improved (1), Northern Territory (NT) has an increased surplus (1), Australia goes from deficit to surplus (1), supporting calculation NT A$1454 to A$3193, Aus A$-41 665 to A$12 303 (2) Comparative points without accurate calculation can be rewarded, but the points must relate to the ‘balance’, not the change in imports or exports alone. (ii) Explain why exports and imports are often measured at constant prices. [2] Constant prices exclude the effect of inflation (1), more accurate in real terms or shows the volume of trade. (b) Explain two additional pieces of information that would be useful in judging Australia’s international financial position. [4] From net income, net transfers, capital account, financial account, foreign reserves, exchange rate, terms of trade or alternatives, identification (1), plus 1 mark for explanation of identified point (1) (c) Analyse the change in average weekly earnings in Australia in real terms between 2008–9 and 2012–13. [4] For an understanding of meaning of ‘real terms’ (1 mark) Real earnings will rise (1), earnings rise more rapidly than inflation (1), supporting calculation 14.6% v. 11.2% (2) (d) With the help of the text and the table, discuss the economic prospects of the Northern Territory. [6] Good prospects: trade in tourism (income elastic), minerals and oil, rising surplus, relatively low inflation rate, higher real wages, growth of working population. Poor prospects: rise in unemployment, dependence on narrow range of production, variable demand, externalities of tourism and mining, lack of sustainability of natural resources. For the identification of points that could affect the economic prospects of the Northern Territories (2 max.) For explanation of why the identified points are relevant to the economic prospects. (2 max.) For comment on the economic prospects of the Northern Territories, for example a reasoned summary or conclusion. (up to 2 marks)

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 22 © University of Cambridge International Examinations 2011 2 (a) Explain the role that a government must fulfil in a mixed economy. [8] A mixed economy is based on private ownership, the profit motive, demand and supply etc. with a role for the government. The role is to provide the environment in which the market can operate successfully. This includes ensuring law and order, national defence, property rights and the provision of public goods and desirable merit goods. It intervenes with taxes, subsidies etc. to influence the behaviour of the private sector and markets and achieve a better allocation of resources. For a definition of the mixed economy (2 marks) For an explanation of the role of government in a mixed economy (6 marks) (b) Discuss the accuracy of the definition of public and merit goods as ‘goods that must be provided by the government’. [12] Public goods are non-rival and non-excludable such as street lighting. Merit goods are goods underprovided by the market system. The consumers lack full information of the consequences of non-consumption. This might include healthcare and pension provision. Although the government provides public goods because it is not possible for the market due to free riders, merit goods are supplied to a greater or lesser extent by private providers. The government also provides other goods and services which are neither public nor merit goods. The definition fits public better than merit goods but is inadequate in itself. For an understanding of public goods and why they are provided by the government (up to 6 marks) For an understanding of merit goods and why they are provided by the government (up to 6 marks) (10 marks max.) Discussion of the accuracy of the definition. (4 marks)

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 22 © University of Cambridge International Examinations 2011 3 (a) Using economic analysis, explain the possible causes of the increase in the sales of electronic goods such as mp3 players in recent years. [8] Influences have come from both the demand and supply side. Rising incomes, advertising, changing fashion and tastes have increased demand. Innovation, the introduction of new and improved products and the lowering of costs have increased supply. The fall in the price of the goods has resulted in an extension of demand. More are being sold at lower prices. Understanding the significance of demand and supply 2 marks Explanation of demand and/or supply changes 6 marks (up to 3 marks for each factor explained) (b) Suggest two possible reasons why a government might increase the indirect tax on such goods and discuss, in the light of these reasons, the likely effectiveness of such a policy. [12] Possible reasons include raising revenue to finance government expenditure, cutting the purchase of imports to help the balance of trade. It might be argued that the products are demerit goods because of the harm to hearing and disturbance to others. An indirect tax is imposed on spending and raises the price of the good. PED measures the responsiveness of demand to a change in price and affects the impact of an increase in an indirect tax. A tax will best reduce the quantity imported when demand for imports is elastic as there will be a more than proportionate fall in demand. To raise revenue it is better for demand to be inelastic so that the fall in demand is less than proportionate to the price rise. The effectiveness of internalising the negative externality will depend upon setting the tax at the appropriate rate. For a definition of indirect tax (1 mark) For an explanation of one reason for an indirect tax and a discussion of ‘effectiveness’ (up to 6 marks with 4 max. if only one element is considered) For an explanation of a second reason for an indirect tax and a discussion of ‘effectiveness’ (up to 6 marks with 4 max. if only one element is considered)

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 22 © University of Cambridge International Examinations 2011 4 (a) Explain why the successful operation of division of labour depends upon the use of money. [8] Division of labour involves dividing the production process into a series of stages. This leads to more specialised outputs which are not necessarily final products. Trading these in a barter system would be difficult, inefficient and probably impossible. Money, anything that is generally acceptable as a means of payment, can act as a medium of exchange and a unit of account, so enabling trade to take place and making division of labour effective. Understanding of division of labour and money 4 marks (one only 3 max.) Explanation of the link between the functions of money and trade 4 marks (b) Discuss whether it is the behaviour of producers, consumers or governments that is most likely to cause inflation. [12] Inflation is a sustained rise in the general price level and is measured by the CPI or RPI. Each of the groups can contribute to inflation although in different ways. Producers may increase prices to raise profit levels or to respond to higher import prices (cost push); consumers may increase their spending and reduce their saving raising AD (demand pull); governments may increase the money supply (monetary inflation), lower direct taxation and run budget deficits (demand pull) and raise indirect taxation (cost push inflation); they may also manipulate the exchange rate. Candidates can argue for any group although government influence may be most widespread. For a definition of inflation 1 mark For an understanding of different types of inflation 6 marks Analysis of the influence of different groups 6 marks (10 marks max.) Discussion of the relative impact of the groups 4 marks