Cambridge A Level Economics 9708 — 2012 May/June Paper 2 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (RCL (JDA)) 48859/2 © UCLES 2012 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level * 1 5 4 0 7 3 4 4 3 0 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) May/June 2012 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/12 © UCLES 2012 Section A Answer this question. 1 Economic Integration The world’s two best known trade groups are probably the European Union (EU) and the North American Free Trade Area (NAFTA). In 2005, a study examined the likely impact of the proposed formation of a third major trade group, JACIK. This would be an economic community comprising Japan, the Association of South East Asian Nations (ASEAN), China, India, and South Korea. ASEAN is a free trade area of ten countries including Indonesia, Malaysia and Singapore. Exporting is an important activity for all three trade groups as shown in Table 1. Table 1: Exports by value and world share, 2003 EU NAFTA JACIK countries Exports (US$ billions) 3523 1486 1657 % of world total 46.5 19.6 21.9 The 2005 study produced models of three levels of economic integration and the welfare gains with each were estimated. The results are shown in Table 2. Table 2: Estimated welfare gains from the formation of JACIK in US$ million Model 1: Free trade of goods and services Model 2: Free trade of goods and services and free movement of capital Model 3: Free trade of goods and services and free movement of both capital and skilled workers Japan 107 626 111 807 150 695 ASEAN 13 451 13 553 19 405 China 6 327 7 100 16 328 India 6 971 7 379 9 937 South Korea 13 043 13 317 14 076 JACIK total 147 418 153 156 210 441 Rest of World total –27 293 – 45 306 109 916 World total 120 125 107 850 320 357

3 9708/23/M/J/12 © UCLES 2012 (a) (i) Use Table 1 to compare the export performance of the three trade groups in 2003. [2] (ii) How might the differences you have identified be explained? [3] (b) (i) State three ways in which an economic union differs from a free trade area. [3] (ii) Explain two problems that might make economic integration difficult. [4] (c) Use Table 2 to show whether the free movement of capital or the free movement of skilled workers is estimated to be more beneficial for JACIK. [2] (d) Discuss how the rest of the world might view the formation of JACIK. [6] Section B Answer one question. 2 (a) Explain whether the factors of production are always of equal economic importance within and between economies. [8] (b) Discuss whether planned economies should always be replaced by free market economies. [12] 3 (a) Explain how income elasticity of demand and cross elasticity of demand can be used to classify different types of goods. [8] (b) Discuss the effectiveness of government use of maximum and minimum prices to help consumers and producers. [12] 4 (a) How does aggregate demand and aggregate supply analysis explain the existence of inflation in the short run? [8] (b) Discuss whether a period of inflation or a period of deflation is more economically desirable. [12]

4 9708/23/M/J/12 © UCLES 2012 BLANK PAGE Copyright Acknowledgements: Question 1 © Nagesh Kumar; Towards a broader Asian community: Agenda for the East Asia Summit; www.ris.org.in/dp100.pap.pdf; November 2005. 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 2012 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 2012 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 2012 9708 23 © University of Cambridge International Examinations 2012 1 (a) (i) Use Table 1 to compare the export performance of the three trade groups in 2003. [2] EU significantly the largest exporter (1), more than the others combined (1), JACIK more exports than NAFTA (1) any 2 points (ii) How might the differences you have identified be explained? [3] Up to two marks for any one explanation with three marks maximum. Examples of explanations for these differences include: • The relative economic strength of each trade group. (up to 2 marks) • The relative openness to trade of each trade group (up to 2 marks) • The degree of self-sufficiency of each trade group (up to 2 marks) • The composition of imports and exports of each trade group. (up to 2 marks) Credit other valid explanations not included above. (b) (i) State three ways in which an economic union differs from a free trade area. [3] Directive word is ‘state’, so no explanation is required. Greater degree of integration (1), common external tariff (1), freedom of movement (1), monetary union (1), common policies (1) any 3 points (ii) Explain two problems that might make economic integration difficult. [4] Economic sovereignty issues (2), different levels of economic development (2), different features of economic system (2), historical influences (2) any two points explained (c) Use Table 2 to show whether the free movement of capital or the free movement of skilled workers is estimated to be more beneficial for JACIK. [2] More impact from free movement of workers (1), + US$ 55 billion against + US$ 5 billion (approx)

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2012 9708 23 © University of Cambridge International Examinations 2012 (d) Discuss how the rest of the world might view the formation of JACIK. [6] The formation of JACIK represents a possible benefit to the rest of the world, but also a potential threat. The benefits are positive in net terms when the free movement of goods and services, capital and labour occurs in JACIK. This might occur as a result of more efficient resource allocation within JACIK leading to greater productivity, and lower prices of goods and services, which if exported will benefit consumers in the rest of the world. Producers in other economies might also benefit from lower component costs. Rising incomes are also likely in the JACIK economies which will expand the market for the exports of other economies. The threats include those to other economies with export sectors that will face fiercer competition and this might lead to reduced sales, falling profits and probable job losses. The data shown in the table need to be interpreted and included as part of the discussion. Up to 4 marks for benefits and up to 4 marks for threats with 6 maximum. 2 (a) Explain whether the factors of production are always of equal importance within and between economies. [8] Factors of production are land, labour, capital and enterprise. While all are likely to be needed to some degree their relative importance differs within and between economies. Advanced economies may rely more on capital with more emphasis on enterprise, developing economies may focus on land and labour. An economy relying on manufacturing will have a different pattern from those relying on agriculture and services. The nature and productivity of the factors will also differ between economies. They are unlikely to be of equal importance either within or between countries. • For knowledge and understanding of the factors of production and their role. 4 marks • For application that explains the relative importance of the factors. 4 marks

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2012 9708 23 © University of Cambridge International Examinations 2012 (b) Discuss whether planned economies should always be replaced by free market economies. [12] A free market economy is based on demand and supply and private activities. A planned economy is based on state ownership and control. Market economies have performed more successfully in terms of living standards. This is attributed to greater efficiency based on consumer sovereignty, incentive and flexibility. Against this can be set greater instability, more unequal distribution of income, higher likelihood of unemployment and the failure of the market to operate effectively. Some of the latter are avoided by the planned economy. The change in eastern European economies supports the preference for the market outcome although it depends upon individual priorities. • For knowledge and understanding of planned and market economies. 2 marks • For an analysis of the advantages and disadvantages of replacing planned economies with free market economies. Up to 8 marks. (One side only 6 max) • For evaluative comment on whether planned economies should always be replaced by free market economies. 2 marks 3 (a) Explain how income elasticity of demand and cross elasticity of demand can be used to classify different types of good. [8] Income elasticity can relate to inferior good where there is a reduction in demand as consumer income rises e.g. bus travel. This would have a negative income elasticity of demand (YED) as Y rises QD falls. Cross elasticity of demand can relate to complementary goods that is consumed in conjunction with another product e.g. bread and butter. There will be a negative cross elasticity of demand (XED) as a rise in the price of one good causes a fall in the demand for the complement. It can also identify substitute or alternative goods e.g. Pepsi-Cola and Coca-Cola where cross elasticity will be positive. Candidates may offer the formulas. • For knowledge and understanding of income elasticity and cross elasticity. 4 marks • For application to different types of goods. 4 marks

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2012 9708 23 © University of Cambridge International Examinations 2012 (b) Discuss the effectiveness of government use of maximum and minimum prices to help consumers and producers. [12] A maximum/minimum price intends to keep prices below/above the market level. The former would benefit consumers, the latter producers. Maximum prices will be ignored and ineffective if set above the market price and minimum will not work if below the market price. A maximum price will benefit those consumers who manage to buy the good but will create a shortage at the set price. This will require government intervention to allocate the restricted supply among the would-be consumers but may result in illegal, black markets that favour the richer consumer. A minimum price will cause an excess supply that will require government action such as storage or destruction with its associated costs. It will favour the producer at the expense of the consumer and taxpayer. Both policies conflict with the market outcome. • For knowledge and understanding of the motives for the setting of government prices. 2 marks • For an analysis of the outcome of maximum and minimum prices. Up to 8 marks (Only one type of government controlled price 6 max) • For overall evaluative comment on ‘effectiveness’ of government prices. 2 marks 4 (a) How does aggregate demand and aggregate supply analysis explain the existence of inflation in the short-run? [8] Aggregate demand is total spending in an economy and it is shown as a curve sloping downward to the right. Aggregate supply is the total amount of output at a given level of prices in the economy and is shown as a curve sloping upward to the right. This may be shown in a diagram. Their interaction sets the equilibrium level of price and real output in the economy. Inflation can be caused by an increase in AD, from increases in its components (C+I+G+(X-M)), or a reduction in AS from influences such as wage rises or more expensive raw materials. • For knowledge and understanding of AD and AS. 4 marks • For application to show how changes in AD and AS can result in inflation. 4 marks

Page 6 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2012 9708 23 © University of Cambridge International Examinations 2012 (b) Discuss whether a period of inflation or a period of deflation is more economically desirable. [12] Inflation is a sustained rise in the general price level. Deflation is a sustained fall in the general price level or a reduction in aggregate economic activity. Inflation has effects on international competitiveness, shoe leather and menu costs, the distribution of income, the ability to plan and the level of confidence. Deflation is linked to rising unemployment, falling economic growth, lower living standards, changing international competitiveness, changing distribution of income (differently to inflation) and loss of confidence. There is some overlap between the effects, and the effects may depend upon the rate of change. Mild inflation is often thought to be desirable. Governments may favour inflation as it reduces the real value of debt and increases income through higher tax revenue. The desirability will depend on the standpoint adopted. • For knowledge and understanding of ‘inflation’ and ‘deflation’. 2 marks • For an analysis of the effects of inflation and deflation. Up to 8 marks (Only inflation or deflation considered 6 max) • For an evaluative comment on the relative desirability of inflation and deflation. 2 marks