Cambridge A Level Economics 9708 — 2011 Oct/Nov Paper 2 · Variant 1

This document consists of 3 printed pages and 1 blank page. DC (SJF/DJ) 35058/2 © UCLES 2011 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level 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. * 0 0 7 7 2 3 1 5 1 4 * ECONOMICS 9708/21 Paper 2 Data Response and Essay (Core) October/November 2011 1 hour 30 minutes Additional Materials: Answer Booklet/Paper

2 9708/21/O/N/11 © UCLES 2011 Section A Answer this question. The Diamond Market 1 The world diamond market was badly hit by the start of the global economic slowdown in 2008. Mines were shut in Southern Africa and Canada, diamond cutters and polishers lost their jobs in India and retail jewellers went out of business in the US. One small piece of good news for the diamond industry was the decision of New York’s government not to introduce a planned 5% luxury tax on jewellery and watches priced over $20 000 in its 2009 – 2010 budget. Fig. 1 shows the monthly price indices for three sizes of diamond (0.5, 3.0 and 4.0 carats) from October 2006 to December 2008. Fig. 1: Diamond price indices October 2006 – December 2008 (base month for each index July 2004 = 100) 0 Oct 06 Dec 06 Feb 07 Apr 07 Jun 07 Aug 07 Oct 07 Dec 07 Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec 08 50 100 150 Diamond price index 200 250 300 4.0 carats 3.0 carats 0.5 carats 350 Source: IDEX Online Research Diamond mining has a controversial history. Mines are expensive to operate and have been associated with low pay for workers and appalling working conditions. In Africa diamonds have financed civil wars. In Canada’s North West Territories mining has been held responsible for damage to the habitat of wildlife.

3 9708/21/O/N/11 © UCLES 2011 (a) Compare the price behaviour of the three sizes of diamond between July 2004 and December 2008. [3] (b) Explain two possible influences on the demand for diamonds. [4] (c) Show, with the help of a diagram, how the introduction of the 5% luxury tax would have affected the supply of diamonds. [4] (d) Using an example from the data, explain the meaning of external cost. [3] (e) Discuss how well diamonds might serve as money if people lose confidence in paper currency. [6] Section B Answer one question. 2 (a) Explain how a government’s approach to making a decision about a construction project might differ from that of a private firm. [8] (b) Discuss whether economists would classify healthcare and national defence in the same way. [12] 3 (a) Explain what determines a country’s comparative advantage in production. [8] (b) Discuss the effectiveness of expenditure-switching policies in reducing a current account deficit on the balance of payments. [12] 4 (a) Explain the factors which determine the size and productivity of a country’s labour force. [8] (b) Discuss the problems that governments face in trying to produce accurate unemployment statistics. [12]

4 9708/21/O/N/11 © UCLES 2011 Copyright Acknowledgements: Question 1 © Diamonds Prices Fall in November; IDEX Online Research, International Diamond Exchange; http@//diafon.net/blog/?=475; 10 April 2009. 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. BLANK PAGE

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the October/November 2011 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. • Cambridge will not enter into discussions or correspondence in connection with these mark schemes. Cambridge is publishing the mark schemes for the October/November 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 – October/November 2011 9708 21 © University of Cambridge International Examinations 2011 1 (a) Compare the price behaviour of the three sizes of diamond between July 2004 and December 2008. 0.5 carat diamonds changed least, almost steady (1), 4.0 carat diamonds changed most (1), tripled at one point then fell back (1), 3.0 carat diamonds followed pattern of 4.0 carats (1), doubled before falling back (1). Any 3 points Answers dealing only with the period shown on the graph can earn full marks Max. 2 marks if no comparison [3] (b) Explain two possible influences on the demand for diamonds. Price (1), affordability/consumer surplus (1) advertising (1), Persuades consumer to buy (‘diamonds are for ever’) (1) Income (1), rising income makes diamonds more affordable (less luxury) (1) Tastes (1), diamonds become more desirable in light of fashion trends (1) Prices of other goods (1), e.g. substitute prices change (1) Any two valid influences, for each identify (1), explanation (1) [4] (c) Show, with the help of a diagram, how the introduction of the 5% luxury tax would have affected the supply of diamonds. No effect at prices below $20 000 Reserve 1 mark (1), acts as an additional cost (1) reduced supply (1) diagram: show shift to left (1) (above $20 000) will diverge by an increasing absolute amount (1) [4] (d) Using an example from the data, explain the meaning of external cost. External cost is the harmful side effect borne by those not directly involved in an economic transaction (third parties) (1), e.g. mining in Canada spoils the environment for others (1), tourists and locals disadvantaged (1) [3] (e) Discuss how well diamonds might serve as money if people lose confidence in paper currency. Functions of money – medium of exchange, store of value, unit of account, standard… (1) Characteristics of money – portable, scarce, durable, and divisible, acceptable etc. (1) Application of functions and characteristics (4) e.g. they are not uniform, are not easily recognisable and would not be generally acceptable so would not act as a medium of exchange, the high basic value of the lowest unit might make it difficult to serve as a unit of account, problems with these functions would make it difficult to be a standard of deferred payment Diamonds are durable, portable and retain their value and so could serve as a good store of value. Reasoned conclusion (1) Max. of 6 [6]

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – October/November 2011 9708 21 © University of Cambridge International Examinations 2011 2 (a) Explain how a government’s approach to making a decision about a construction project might differ from that of a private firm. Government can take a wider view of social welfare than a firm concerned with profit maximisation. External costs and benefits in addition to private costs and benefits may be considered. Cost benefit analysis (CBA) can be used to establish the balance of social costs and benefits. The decision on whether a project is worthwhile may differ between the two parties. Understanding of private and external costs/benefits of construction 4 marks Explanation of different purpose (2) and method of CBA (2) 4 marks [8] (b) Discuss whether an economist would classify healthcare and national defence in the same way. Usual classifications are private, merit, public and normal goods. Healthcare is a private good as it has excludability and rival, national defence is a public good being non-excludable and non-rival. Health care is a merit good based on inadequate information of the consumer and under-provision by the market and it has external benefits. Defence is not considered a merit good. While healthcare is a clearly a normal good national defence could also be considered a normal good. They might be considered the same in that government provision may be needed to obtain the appropriate level of provision. Both could be classified as services rather than goods. Understanding of the possible classifications Up to 2 marks Application of the classifications to healthcare and defence Up to 6 marks Discussion of the similarities and dissimilarities Up to 6 marks Reasoned conclusion (1) Max. of 12 [12]

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – October/November 2011 9708 21 © University of Cambridge International Examinations 2011 3 (a) Explain what determines a country’s comparative advantage in production. Comparative advantage occurs when a country has a lower opportunity cost in the production of a good than another country. This may be based on the quality and nature of its factors of production, production methods, technology, transport costs, exchange rates, government policies etc Understanding of comparative advantage and opportunity cost 4 marks Explanation of the influences on comparative advantage 4 marks [8] (b) Discuss the effectiveness of expenditure-switching policies in reducing a current account deficit on the balance of payments. Current account deficit means a net outflow on goods and services, transfers and income. Expenditure-switching involves encouraging domestic consumers to move from imports to domestic products and foreign consumers to buy more imports to replace their own products. Methods include devaluation, tariffs and subsidies. These may be effective in improving the trade position and boosting domestic employment but have drawbacks. They may draw retaliation, reduce specialisation, lower choice, and raise prices. They may not be effective, depending upon elasticities and reactions of trading partners. Understanding of current account deficit and expenditure-switching 4 marks Analysis of the operation and benefits of expenditure-switching 4 marks Discussion of the drawbacks of expenditure-switching 4 marks Reasoned conclusion (1) Max. of 12 [12]

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – October/November 2011 9708 21 © University of Cambridge International Examinations 2011 4 (a) Explain the factors which determine the size and productivity of a country’s labour force. The labour force is the proportion of the population in employment or available for work. Productivity is the output per worker. The size depends upon the population’s size and age distribution, rules about retirement and school-leaving, cultural attitudes etc. Productivity will depend upon health, training, capital equipment etc. Meaning of labour force and productivity 4 marks Explanation of influences on size (2) and productivity (2) 4 marks [8] (b) Discuss the problems that governments face in trying to produce accurate unemployment statistics. Unemployment is measured by the labour force survey (ILO method) and the claimant (those claiming benefits) methods. The unemployed are those without paid work, available for work and seeking work. The LFS is thought more accurate because of regular (3 monthly), valid sampling techniques. The claimant count ignores those not entitled to benefits or who do not claim them and rules for eligibility are changeable. Governments may lack resources to collect accurate data, an informal economy may exist, fraudulent data may be supplied, some may be ‘unemployable’, and there may be political reasons to massage the data. Understanding of unemployment and recognition of measurement methods Up to 4 marks) 6 Analysis of the accuracy of the two methods Up to 4 marks) max. Discussion of the problems faced in the calculation 6 marks Reasoned conclusion (1) Max. of 12 [12]