Cambridge A Level Economics 9708 — 2011 May/June Paper 2 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (NF/DJ) 34424/3 © UCLES 2011 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level * 5 7 4 3 8 2 7 3 7 6 * ECONOMICS 9708/23 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.

2 9708/23/M/J/11 © UCLES 2011 Section A Answer this question. 1 The Singapore Exchange Rate Singapore is a relatively small, open economy which relies heavily on international trade. The values of both its exports and imports are more than 100% of its GDP. Its largest trading partners are Malaysia, China and the US. In the second half of 2008 its economy faced a sharp downturn, with a large fall in its exports that affected the Singapore exchange rate. Fig. 1 shows the exchange rate of the Singapore dollar (S$) in terms of the US dollar (US$) between 1980 and 2010. Fig. 1: The Singapore Exchange Rate 1980–2010 1980 (Source: Pacific Exchange Rate Service) 0.425 0.450 0.475 0.500 0.525 0.550 0.575 0.600 0.625 Singapore dollar (in US$) 0.650 0.675 0.700 0.725 0.750 1985 1990 1995 2000 2005 2010 Singapore has a unique exchange rate system. The Monetary Authority of Singapore (MAS) uses the exchange rate to maintain price stability and encourage economic growth. The main features of the system are that: 1 the S$ is managed against a weighted basket of currencies of its major trading partners and competitors, 2 the exchange rate is allowed to move within an undisclosed trading band but not to move outside of it, 3 the trading band is reviewed typically every three months and changed if necessary. The poor economic conditions in March 2009 caused the MAS to lower the trading band which was the same as a depreciation of the S$.

3 9708/23/M/J/11 © UCLES 2011 (a) Compare the exchange rate of the S$ against the US$ from the beginning of 1980 to the beginning of 2010. [2] (b) Analyse the possible changes in the demand for and the supply of the S$ that could account for the trends in its exchange rate between 1997 and 2007. [4] (c) Explain two ways in which an appreciating exchange rate can help to reduce inflation. [4] (d) Using the extract, consider whether Singapore has both a floating and a fixed exchange rate system. [4] (e) Discuss whether an economy will benefit from a fall in its exchange rate. [6] Section B Answer one question. 2 (a) Explain how resources are allocated in a free market economy. [8] (b) Discuss how the market system might be influenced by government intervention to provide appropriate quantities of goods and services. [12] 3 (a) Explain how and why the price elasticity of supply of agricultural goods differs from that of manufactured goods. [8] (b) Discuss whether the payment of government subsidies to farmers is a beneficial policy. [12] 4 (a) Explain the limitations of the theory of comparative advantage in accounting for a country’s pattern of trade. [8] (b) Discuss whether the introduction of trade barriers against imports can always be justified. [12]

4 9708/23/M/J/11 © UCLES 2011 BLANK PAGE Copyright Acknowledgements: Question 1 © Professor Werner Antweiler; Pacific Exchange Rate Service; http://fx.Sander.ubc.ca; 15 March 2010. 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 9708/23 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 23 © University of Cambridge International Examinations 2011 1 (a) Compare the exchange rate of the S$ against the US$ from the beginning of 1980 to the beginning of 2010. [2] It appreciated/rose (1), by approx 50% or US$0.24 (1) (b) Analyse the possible changes in the demand for and the supply of the S$ that could account for the trends in its exchange rate between 1997 and 2007. [4] A depreciation between 1997 and 2001(1) may be the result of a fall in demand and/ or a rise in the supply of S$ (1), the appreciation between 2002 and 2007 (1) may be the result of a rise in demand and/or a fall in supply of S$ (1) (c) Explain two ways in which an appreciating exchange rate can help to reduce inflation. [4] Appreciation will reduce the price of imports (1), lessening cost-push pressure (1) Exports are more expensive (1), reducing demand-pull pressure (1) (d) Using the extract, consider whether Singapore has both a floating and a fixed exchange rate system. [4] Elements of floating include movement within trading band (1), fluctuation of exchange rate shown in data (1) Fixed includes MAS intervention (1), set limits to movement (1) (e) Discuss whether an economy will benefit from a fall in its exchange rate. [6] Benefits: improved balance of trade; more competitive industry; higher employment and income; increased growth Drawbacks: only works with Marshall-Lerner condition and elasticity of supply; generates inflationary pressure; undermined by retaliation; reduced purchasing power of currency Max. 4 marks for one side only

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 23 © University of Cambridge International Examinations 2011 2 (a) Explain how resources are allocated in a free market system. [8] A free market system relies on demand and supply without government intervention. Resources are the factors of production. Consumer and producer behaviour results in demand and supply changes leading to price changes. Higher prices, profits and rewards draw more resources to that use. Price falls do the opposite. Understanding of the free market and resources 4 marks Explanation of the operation of the price mechanism 4 marks (b) Discuss how the market system might be influenced by government intervention to provide appropriate quantities of goods and services. [12] Markets may fail by under-provision, over-provision or non-provision of goods and services. This relates to merit goods, demerit goods and public goods. The government can undertake state provision, subsidisation, taxation and product bans and regulation. Each method can be judged by its cost, effectiveness and side effects. State provision will make the goods available but may be costly and inefficient. Subsidisation will reduce the cost of the good but will interfere with the market mechanism and be a burden to taxpayers. Taxation regulates consumption and raises revenue but imposes burdens on producers and consumers. Bans and regulation prevent production but may lose some benefits and create unemployment and enforcement costs. Understanding of the failings of market provision 4 marks Analysis of the nature of intervention 4 marks Discussion of the problems of intervention 4 marks

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 23 © University of Cambridge International Examinations 2011 3 (a) Explain how and why the price elasticity of supply of agricultural goods differs from that of manufactured goods. [8] Price elasticity of supply measures the responsiveness of supply to changes in price. Agricultural goods tend to be more price inelastic (PES<1) than manufactured goods. The influences at work are perishability of product, specialised storage, growing period, capacity availability, ability to switch products, nature of additional costs etc. Understanding of PES in these cases 4 marks Explanation of influences in the two cases. 4 marks (b) Discuss whether the payment of government subsidies to farmers is a beneficial policy. [12] Subsidies are payments to producers which reduce costs. They shift the supply curve to the right, lowering price and increasing quantity. This will raise farm incomes if PED is elastic but not if it is inelastic. Subsidies will lower prices for consumers and help make domestic farmers competitive with foreign producers so helping the balance of trade. They will enable farmers to stay in business with effects on employment and the environment. The benefit will be split between the consumer and farmer depending upon the elasticities involved. Against this, subsidies may undermine the operation of the market, keep resources in an inefficient use, raise the tax burden, reduce government expenditure on other groups and may be ineffective in raising farm incomes. Understanding of the meaning and effect of subsidies 4 marks Discussion of the benefits of subsidies 4 marks Discussion of the drawbacks of subsidies 4 marks

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 23 © University of Cambridge International Examinations 2011 4 (a) Explain the limitations of the theory of comparative advantage in accounting for of a country’s pattern of trade. [8] Comparative advantage is found when a country can produce at a lower opportunity cost than another. This reflects the country’s factor endowment. It is the basis for specialisation, increased output and the benefits of trade. The theory is based on some restrictive assumptions which limit its explanatory value. These include bilateral rather than multilateral trade, absence of transport costs, mobility of factors, constant returns, full employment and reciprocal demand. These assumptions may not exist in practice. Understanding of comparative advantage 4 marks Explanation of the limitations of the theory of comparative advantage 4 marks (b) Discuss whether the introduction of trade barriers to imports can be justified. [12] Trade barriers include tariffs, quotas, export subsidies, misaligned exchange rates, administrative restrictions, exchange control etc. These are intended to reduce imports and the corresponding outflow of currency. Barriers can be justified in terms of protection of infant industries, prevention of dumping, raising revenue, short-run employment protection, improving the terms of trade and avoiding overspecialisation. On the other hand, barriers will prevent the benefits of international trade which include lower prices, more choice, more efficiency and higher living standards. Barriers may face retaliation and breach international obligations e.g. those of the World Trade Organisation. Understanding of the types and purpose of trade barriers 4 marks Discussion of the benefits of trade barriers 4 marks Discussion of the drawbacks of trade barriers 4 marks