Cambridge A Level Economics 9708 — 2011 Oct/Nov Paper 2 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (SJF) 35060/3 © 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. * 2 1 7 0 7 2 6 2 6 9 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) October/November 2011 1 hour 30 minutes Additional Materials: Answer Booklet/Paper

2 9708/23/O/N/11 © UCLES 2011 Section A Answer this question. 1 The World Potato Market 2008 was the International Year of the Potato. The Swiss Government even celebrated the event by issuing a postage stamp showing a picture of a potato. In recent years there have been considerable changes in the international market for potatoes. Table 1 shows changes in the supply of potatoes from developed and developing countries. Table 1: World potato production 1991–2007 (million tonnes) 1991 1999 2007 Developed countries 183.13 165.93 159.89 Developing countries 84.86 135.15 165.41 World total 267.99 301.08 325.30 Different regions of the world produce and consume different quantities of potatoes as shown in Table 2. Table 2: Regional production and consumption of potatoes Production (tonnes per hectare, 2007) Consumption (kilos per head, 2005) Africa 10.8 13.9 Asia & Oceania 15.7 23.9 Europe 17.4 87.8 Latin America 16.3 20.7 North America 41.2 60.0 The nature of the trade in potatoes has also changed as the growth of trade in processed products, such as frozen and dehydrated potatoes, has overtaken trade in fresh potatoes. Processed potatoes are used by fast food, snack and convenience food industries and sell at higher prices than fresh potatoes. Tariffs, food health standards and technical regulations are used by some countries to protect domestic potato markets. Potatoes provide a good example of ‘tariff escalation’, where a country imposes higher tariffs on processed products than it does on raw materials. For example the average world tariff on fresh potatoes was 29%, while that on some processed potato products ranged from 38% to 109%.

3 9708/23/O/N/11 © UCLES 2011 (a) Use Table 1 to identify the main changes in world potato production between 1991 and 2007. [3] (b) With reference to Table 2, what might explain the different production per hectare in North America and Africa? [3] (c) Explain two possible reasons for different levels of potato consumption. [4] (d) Consider the likely cross elasticity of demand between fresh potatoes and processed potatoes. [4] (e) Discuss the effect on world trade and welfare of the spread of ‘tariff escalation’. [6] Section B Answer one question. 2 (a) Explain, with the help of a diagram, how an economy can in the short run and long run enjoy consumption beyond its current production possibility curve. [8] (b) Discuss the effectiveness of free market economies in raising the level of welfare. [12] 3 (a) Explain the significance of a rise in the terms of trade for a country. [8] (b) Discuss whether government action is the most likely cause of a current account surplus on the balance of payments. [12] 4 (a) Explain, with the help of a diagram, the effect of a depreciation of a country’s exchange rate on that country’s rate of inflation. [8] (b) Inflation affects an economy both domestically and internationally. Discuss which effect is likely to be more significant. [12]

4 9708/23/O/N/11 © UCLES 2011 BLANK PAGE Copyright Acknowledgements: Question 1 © International Year of the Potato; Hidden Treasure; Potato World; pp. 1-2; United Nations (FAO); http://www.potato2008org/en/world/index.html; 17 September 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.

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 9708/23 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 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 23 © University of Cambridge International Examinations 2011 1 (a) Use Table 1 to identify the main changes in world potato production between 1991 and 2007. [3] World production increased (1), production in developed economies fell while production in developing economies rose (1), developing overtook developed (1), greater change in developing economies production than in developed (1). Use of data to support (1 mark) (b) With reference to Table 2, what might explain the different production per hectare in North America and Africa? [3] For a general comment that North America is more efficient/productive that could be explicit or implicit (1), reasons such as more equipment, more fertiliser, better infrastructure, more suitable climate (up to 2). This could be one point developed or two distinct points. (c) Explain two possible reasons for the different levels of potato consumption. [4] Tastes, custom, availability, relative price, income level, substitutes etc. Identification of factor (1) plus explanation (1) x two reasons. (d) Consider the likely cross elasticity of demand between fresh potatoes and processed potatoes. [4] XED meaning or formula (1), substitutes have positive value (1), good substitutes have a high value or poor substitutes have a low value (1), reasoning applied to this case (1) (e) Discuss the effect on world trade and welfare of the spread of ‘tariff escalation’. [6] General tariff case. Tariff harm: raises price, reduces trade, choice and welfare (the technical definition of welfare is not required. Consider welfare as general well-being). (Up to 3 marks) Tariff benefits: protects domestic producers and helps independence and security. Protects domestic consumers from demerit goods. (Up to 3 marks) 4 marks maximum for general tariff discussion. Tariff escalation. This prevents changes in production patterns by protecting higher value added goods produced in developed countries and keeps developing countries in raw material production. This benefits developed countries. (Up to 2 marks)

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – October/November 2011 9708 23 © University of Cambridge International Examinations 2011 2 (a) Explain, with the help of a diagram, how an economy can in the short-run and long run enjoy consumption beyond its current production possibility curve. [8] A production possibility curve (ppc) shows the maximum possible combination of two goods that can be produced using all its resources. Points outside of the ppc are unattainable by the economy itself. In the short run international trade enables a country to enjoy more than it can produce by running a trade deficit. In the long run technical progress and additional resources can move the ppc out beyond its current position as it achieves economic growth. Understanding of ppc and short-run limitation on production (4 marks). Short-run (up to 3 marks) and Long-run (up to 3 marks) ability to increase production possibility. 4 marks maximum for consideration of short run and long run. (4 marks) (b) Discuss the effectiveness of free market economies in raising the level of welfare. [12] Free market economies are based on the market system and have restricted government intervention. Their strength is in efficiency, competition and incentive which should result in lower prices, good quality and choice. Individuals are able to become wealthy and average living standards are generally high. The system has its drawbacks as the profit motive may prevent the supply of public goods and restrict the supply of merit goods. It ignores imperfect information and the existence of externalities so preventing socially optimal output. It does not guarantee employment and economic security and may result in a highly uneven distribution of income and wealth. Understanding of market economies and welfare indicators. (The technical definition of welfare is not required. Consider welfare as general well-being). (4 marks). For a discussion of how market economies might result in a rise in the level of welfare (up to 5 marks). For a discussion of how market economies might result in a lowering of the level of welfare (up to 5 marks). 8 marks maximum for consideration of impact of market economies. (1 mark should be reserved within this for a reasoned conclusion)

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – October/November 2011 9708 23 © University of Cambridge International Examinations 2011 3 (a) Explain the significance of a rise in the terms of trade for a country. [8] The terms of trade relate the price of exports to the price of imports. They are measured by the price of exports/price of imports and expressed as an index. A rise may result if export prices rise relative to import prices. The significance of a favourable move is that a given quantity of exports will be able to buy a greater quantity of imports and raise living standards. However, the same rise in the terms of trade may reduce a country’s international price competitiveness and harm the balance of trade. Understanding of a rise in the terms of trade (4 marks). (Definition 1 mark) (Formula or calculation 1 mark) (Explanation/illustration of ‘rise in terms of trade’ 2 marks.) Explanation of favourable outcomes up to 2 marks Explanation of unfavourable outcomes up to 2 marks (4 marks). (b) Discuss whether government action is the most likely cause of a current surplus on the balance of payments. [12] A current account surplus occurs when inflows from trade, transfers and income are greater than outflows. Government may influence trade by trade protection policies, industrial support and by intervening in the exchange rate. The government involvement in transfers may mean receipt of aid, international contributions and grants. Income is more likely to link to the private sector. Other causes of surplus are based on private activity in efficient production and innovation. Income is likely to be from previous private overseas investment and loans and transfers can result from private remittances. For some economies the main factor may be resource endowment, national attitudes, political relationships and geography. The role and impact of the government will also vary with the nature of the economic system. Examples may be given. Understanding of current account surplus (2 marks) Discussion of government influences up to (6 marks). Discussion of non-government influences up to (6 marks). (10 marks maximum for discussion element of question) 1 mark should be reserved within this for a reasoned conclusion

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – October/November 2011 9708 23 © University of Cambridge International Examinations 2011 4 (a) Explain with the help of a diagram, the effect of a depreciation of a country’s exchange rate on that country’s rate of inflation. [8] Depreciation under a floating exchange rate can lower export prices and raise import prices. Lower export prices will raise aggregate demand and contribute to demand pull inflation. Higher import prices may contribute to higher costs (cost push inflation) and deflect demand to local products (demand pull inflation). All of these factors would raise the rate of inflation. This would be shown in an aggregate demand and supply diagram with a left shift in AS and a right shift in AD. Understanding of price changes (2) as a result of depreciation (2). (Up to 4 marks) Explanation of links between depreciation price change and inflation through diagram showing AS shift (2) and AD shift (2). (Up to 4 marks) (b) Inflation affects an economy both domestically and internationally. Discuss which effect is likely to be more significant. [12] Inflation is a persistent rise in the price level. The domestic consequences affect real values, the distribution of income, employment levels, production costs and planning. The international consequences stem from the loss of competitiveness with a trade imbalance that affects the exchange rate and employment levels. In both cases the seriousness of the impact depends upon the level of inflation, whether it is anticipated and the importance of trade to an economy. There will be less impact domestically if there is indexation and internationally if other countries also experience inflation. For most economies the domestic effects are liable to be felt by more of the population. For a definition of inflation. (Up to 2 marks). For a discussion of the domestic effects of inflation. (Up to 6 marks). For a discussion of the international effects of inflation. (Up to 6 marks). (10 marks maximum for discussion element of question) 1 mark should be reserved within this for a reasoned conclusion