Cambridge A Level Economics 9708 — 2012 Oct/Nov Paper 2 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (SJF/CGW) 52327/1 © UCLES 2012 [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. * 5 5 7 4 7 4 5 0 2 3 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) October/November 2012 1 hour 30 minutes Additional Materials: Answer Booklet/Paper

2 9708/23/O/N/12 © UCLES 2012 Section A Answer this question. Petrol Prices and Elasticity 1 The price of petrol in the United States (US) is determined mainly by market forces but in China the Government actively intervenes to set the petrol price. However, in 2009 it introduced a policy by which the price of petrol in China would more closely follow the world price of crude oil. The price of petrol in the two countries is shown in Fig. 1. Fig. 1 The price of petrol in the US and China, US$ per litre, January 2008–September 2009 1.2 1.0 0.8 0.6 US$ per litre 0.4 0.2 0 J J 2008 Sources: EIA; CEIC 2009 China United States J F M M A A S O N D J J J F M M A A S The consumption of petrol generates considerable externalities and petrol is also a heavily taxed product. It is often quoted as an example of a product with an inelastic price elasticity of demand (PED). Studies in different countries have produced varied results. A South African study in 2004 gave a short-run PED of –0.21 and a long-run PED of –0.51. In 2008 an Australian study put the short-run PED between –0.1 and –0.14 and the long-run PED between –0.2 and –0.3. (a) (i) Compare the price of petrol in the US and China between January 2008 and September 2009. [2] (ii) How does Fig. 1 confirm that it is in China rather than in the US that the price of petrol is set by the government? [2] (b) Explain how the consumption of petrol generates externalities. [4] (c) (i) Identify two points about the PED of petrol on which the studies agree. [2] (ii) Explain why the values of the short-run and long-run PEDs for petrol are different. [4] (d) Discuss the possible consequences of the Chinese price setting policy between January 2008 and September 2009. [6]

3 9708/23/O/N/12 © UCLES 2012 Section B Answer one question. 2 (a) Explain, with the aid of a diagram, what changes will alter the amount of consumer surplus available from the consumption of a good. [8] (b) Discuss why in many countries some services, such as education and healthcare, are supplied both by the government and private producers. [12] 3 (a) Explain the factors that might cause a fall in a country’s terms of trade. [8] (b) Discuss the view that unrestricted free trade has as many disadvantages as advantages. [12] 4 (a) Explain how an economy may face a deficit in its trade in goods yet have a surplus on its current account of the balance of payments. [8] (b) Discuss whether a satisfactory balance of payments, a strong exchange rate and a low rate of inflation are likely to be achieved at the same time. [12]

4 9708/23/O/N/12 © UCLES 2012 BLANK PAGE Copyright Acknowledgements: Question 1 © The Economist, 19 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.

CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the October/November 2012 series 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 should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the October/November 2012 series for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level components and some Ordinary Level components.

Page 2 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 23 © Cambridge International Examinations 2012 1 (a) (i) Compare the price of petrol in the US and China between January 2008 and September 2009. [2] US petrol dearer pre-October 2008 (1 mark), Chinese petrol dearer post October 2008 (1 mark), Chinese price rose while U.S. price fell (1 mark), Chinese price less volatile (1 mark) Any two points. (2 marks total) (ii) How does Fig. 1 confirm that it is in China rather than in the US that the price of petrol is set by the government? [2] The stepped nature and period of stability (1 mark) suggest that it is government action rather than market forces that determine price in China (1 mark). Allow analysis from the US view i.e. US price more volatile (1 mark), because it is subject to market forces (1 mark) (Up to 2 marks) (b) Explain how the consumption of petrol generates externalities. [4] Externalities affect third parties (spill-over effects) (1 mark); they can be negative externalities (1 mark). In the case of petrol they are harmful and they generate air pollution that contributes to ill-health and global warming. (up to 2 marks) (Up to 4 marks) (c) (i) Identify two points about the PED of petrol on which the studies agree. [2] PED of both is inelastic (1 mark) short-run PED is more inelastic than long-run PED in both cases (1 mark), both have negative value confirming expected inverse price/demand relationship, (1 mark) Any two points. (2 marks total) (ii) Explain why the values of the short-run and long-run PEDs for petrol are different. [4] In the short-run the consumer has less time to respond to the price change by adjusting spending (1 mark). One further mark for elaboration of this statement (1 mark) (up to 2 marks) In the long-run the consumer has more time to substitute cars for other forms of transport (1 mark). One further mark for elaboration of this statement (1 mark) (up to 2 marks) (Up to 4 marks)

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 23 © Cambridge International Examinations 2012 (d) Discuss the possible consequences of the Chinese price fixing policy between January 2008 and September 2009. [6] Keeping the price lower will help low income consumers, reduce inflationary pressure and keep production costs down. It may encourage waste, cause petrol producers to lose money and cause shortages. (up to 4 marks) Keeping the price higher will reflect market pressures, encourage responsible use through less waste. It may harm consumers, especially those on low incomes. (up to 4 marks) Also, allow marks for stability (up to 4 marks) General arguments concerning the efficiency of resource allocation should be credited. (6 marks maximum) 2 (a) Explain, with the aid of a diagram, what changes will alter the amount of consumer surplus available from the consumption of a good. [8] For knowledge and understanding of consumer surplus illustrated with an appropriate diagram. (Up to 4 marks. Allow 3/1 or 1/3 split). For an analysis of how changes in demand and/or supply change consumer surplus through their impact upon price. (Up to 4 marks) (8 marks total) (b) Discuss why in many countries some services, such as education and healthcare, are supplied both by the government and private producers. [12] For knowledge and understanding of private goods and merit goods. (Up to 2 marks) For an analysis of government and private supply of education and healthcare. (Allow 4/2 or 2/4 split) (Up to 6 marks) For evaluative comment on government and private supply of education and healthcare. (Up to 4 marks) (12 marks total) 3 (a) Explain the factors that might cause a fall in a country's terms of trade. [8] For knowledge and understanding of the terms of trade with illustration of a fall in the index. (Up to 4 marks. Allow 3/1 or 1/3 split). For an analysis of the factors that cause a fall in terms of trade e.g. exchange rate depreciation, relative rates of inflation etc.) (Up to 4 marks) (8 marks total)

Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 23 © Cambridge International Examinations 2012 (b) Discuss the view that unrestricted free trade has as many disadvantages as advantages. [12] For knowledge and understanding of meaning of 'unrestricted free trade' (Up to 2 marks) For an analysis of the advantages and disadvantages of unrestricted free trade (Allow 4/2 or 2/4 split) (Up to 6 marks) For evaluative comment on relative strength of the advantages and disadvantages. (Up to 4 marks) (12 marks total) 4 (a) Explain how an economy may face a deficit in its trade in goods yet have a surplus on its current account of the balance of payments. [8] For knowledge and understanding of the relevant structure of the current account deficit in trade in goods and surplus on current account. (Up to 4 marks. Allow 3/1 or 1/3 split). For an analysis of the offsetting inflows that create a surplus on current account. (Up to 4 marks) (8 marks total) (b) Discuss whether a satisfactory balance of payments, a strong exchange rate and a low rate of inflation are likely to be achieved at the same time. [12] For knowledge and understanding of the targets identified. (Up to 2 marks) For an analysis of the relationships between the targets. (Up to 6 marks) For evaluative comment on the compatibility of the targets and likelihood of the targets being achieved at the same time. (Up to 4 marks) (12 marks total)