Cambridge A Level Economics 9708 — 2013 May/June Paper 2 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (NF/KN) 66276/2 © UCLES 2013 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level * 2 5 6 7 8 8 8 9 5 3 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) May/June 2013 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/13 © UCLES 2013 Section A Answer this question. The market for gold 1 The price of gold reacts to changing economic conditions and the level of economic confidence. Periods of economic downturn and uncertainty, such as 2008–9 and 2010, produce major changes in the gold price. This can be seen in Fig. 1 which shows the nominal and real price of gold between 1970 and 2010. The real prices are in terms of 1970 prices, which is the base year. Fig. 1 Nominal and real prices of gold, US$ 1970 to 2010 1970 75 80 85 90 95 2000 05 10 0 250 500 750 1000 1 250 US$ per ounce Real Price Nominal Price Source: Thomson Reuters The supply of gold is made up of newly mined gold, gold sold from the stocks held by central banks and scrap gold, mainly from the sale of old jewellery. In 2003, 986 tonnes of scrap gold were traded at an average price of $280 per ounce but by 2009, 1674 tonnes were traded at an average price of $972 per ounce. Gold is demanded for its use in industrial production, in dentistry, as jewellery and as a store of value. Gold is used as an insurance against uncertainty and traders may speculate on the price movements of gold. Fig. 2 shows the changes in the pattern of supply of gold between 2001 and 2009. Fig. 2 Gold supply (’000 tonnes), 2001 to 2009 0 1 2 3 4 5 2001 02 03 04 05 06 07 08 09 Source: GFMS Scrap Mining Central bank sales ’000 tonnes

3 9708/23/M/J/13 © UCLES 2013 (a) (i) Compare the difference between nominal and real prices of gold over the period 1970 to 2010. [2] (ii) A gold trader in 2010 said that ‘the price of gold has never been higher’. Explain whether Fig. 1 confirms this statement. [2] (b) Use the data to estimate the price elasticity of supply of scrap gold between 2003 and 2009 and state whether it is elastic or inelastic. [4] (c) (i) What were the changes in the sources of supply of gold between 2001 and 2009? [2] (ii) Explain two possible reasons for these changes. [4] (d) Discuss the extent to which gold is like other consumer goods, and whether the gold market operates like a consumer good market. [6] Section B Answer one question. 2 (a) With the help of a diagram, explain how a production possibility curve can illustrate the concepts of opportunity cost and economic growth. [8] (b) Discuss whether free market economies or centrally planned economies are more likely to make choices that will maximise the benefit for consumers. [12] 3 (a) Explain, using economic analysis, how economists decide whether goods are substitutes or complementary goods. [8] (b) Explain on which goods and services the government should impose indirect taxes to ensure that the incidence of the tax falls mainly on consumers, and discuss the extent to which consumer surplus would be affected. [12] 4 The best way to reduce a deficit on the current account of the balance of payments is to change the value of the deficit country’s exchange rate. (a) Explain how a change in a country’s exchange rate might reduce a deficit on the current account of its balance of payments. [8] (b) Discuss whether changing the exchange rate or imposing tariffs is the better way of reducing a deficit on the current account of the balance of payments. [12]

4 9708/23/M/J/13 © UCLES 2013 BLANK PAGE Copyright Acknowledgements: Question 1 © Bullish about bullion; Thomson Reuters. © Balancing the ounces; Gold Fields Mineral Services. 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 May/June 2013 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 May/June 2013 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 – May/June 2013 9708 23 © Cambridge International Examinations 2013 1 (a) (i) Compare the difference between nominal and real prices of gold over the period 1970 to 2010. [2] Prior to 1980 there was relatively little difference (1), between 1980 and 2005 nominal prices were more than double real prices (1), after 2005 there was an increasingly large nominal excess (1). Any two points. (ii) A gold trader in 2010 said that ‘the price of gold has never been higher’. Explain whether Fig. 1 confirms this statement. [2] This is only correct in nominal terms (1) in real terms it was higher in 1980 (1). (b) Use the data to estimate the price elasticity of supply of scrap gold between 2003 and 2009 and state whether it is elastic or inelastic. [4] Formula or definition of PES (1) supply rose from 986 to 1674 tonnes or 69.7%, price rose from $280 to $972 or 247% (1) PES is 0.28 (1) supply is inelastic (1). (c) (i) What were the changes in the sources of supply of gold between 2001 and 2009? [2] Scrap was the only one to increase (1), mining barely altered (1), central bank sales fell to a low for the period (1). Any two points. (ii) Explain two possible reasons for these changes. [4] Individuals need to realise assets in difficult economic circumstances, a period of recession, falling employment and uncertainty (2). Mining might be restricted by natural conditions making increased output difficult (2). Central banks had a low level of stocks because of previous sales, possibly because of budget considerations and did not want to reduce them further or central bankers may have sought a boost to the value of their reserves as one component appreciates, so did not sell (2). (d) Discuss the extent to which gold is like other consumer goods, and whether the gold market operates like a consumer good market. [6] Gold has a normal demand and supply curve. Price and quantity react in the normal way. It has a range of substitutes in the form of other precious metals, property, and bonds and equities (2). The product is somewhat unusual in that it is demanded as a durable good and a financial investment and there are diversified sources of supply for gold. Its price is relatively unstable (2). The market is typical in that demand and supply are at work and that price reacts in a normal way to D and S changes (2), it is unusual that central banks can be active in the market, consumers can also be suppliers and speculators may be at work (2). Detailed knowledge of the gold market is not expected. Allow reasonable assumptions about the nature of the product and market based on the data. Credit a reasoned conclusion.

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 23 © Cambridge International Examinations 2013 2 (a) With the help of a diagram, explain how a production possibility curve can illustrate the concepts of opportunity cost and economic growth. [8] This question tests the grasp of some basic concepts in Economics that can be demonstrated through the Production Possibility Curve. • For a knowledge and understanding of the production possibility curve supported by an appropriate diagram. Up to 4 marks. • For application showing how a production possibility curve can illustrate both opportunity cost and choice. Up to 4 marks (allow 3/1 or 1/3 split). (b) Discuss whether free market economies or centrally planned economies are more likely to make choices that will maximise the benefit for consumers. [12] The candidate needs to explain that choices are made through the forces of demand and supply in a free market economy. This is likely to give a different allocation of resources compared to that in a centrally planned economy. The impact depends upon a number of factors in the market driven by market forces and the profit motive. In the centrally planned economy it depends upon decisions taken by planning committees. They may or may not choose to prioritise current consumer welfare. • For analysis of how choices are made to maximise the benefit for consumers in each type of economy. Up to 8 marks. • For evaluative comment on the ‘more likely’ aspect of the question. Up to 4 marks. 3 (a) Explain, using economic analysis, how economists decide whether goods are substitutes or complementary goods. [8] • For knowledge and understanding of the concept of cross elasticity of demand with examples of substitutes and complements. Up to 4 marks. • For application that uses the coefficient to classify each type of good. Up to 4 marks. (b) Explain on which goods and services the government should impose indirect taxes to ensure that the incidence of the tax fell mainly on consumers and discuss the extent to which consumer surplus will be affected [12] The incidence of indirect taxes depends upon the elasticity of demand and supply of the taxed goods. If the government wished to ensure that the tax fell on consumers they should choose goods with an inelastic demand and an elastic supply. This would reduce consumer spending power and lower their standard of living. • For analysis of the influence of elasticity on the incidence of indirect tax and the goods and services the government should choose. Up to 8 marks. • For evaluative comment on the extent to which consumer surplus will be affected. Up to 4 marks.

Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 23 © Cambridge International Examinations 2013 4 The best way to reduce a deficit on the current account of the balance of payments is to change the value of the deficit country’s exchange rate. (a) Explain how a change in a country’s exchange rate might reduce a deficit on the current account of its balance of payments. [8] • For knowledge and understanding of the key terms current account deficit and the meaning of a reduction of the exchange rate. Up to 4 marks (allow 3/1 or 1/3 split). • For analysis of how a reduction in the exchange rate corrects a deficit on the current account of the balance of payments. Up to 4 marks. (b) Discuss whether changing the exchange rate or imposing tariffs is the better way of correcting a deficit on the current account of the balance of payments. [12] • For analysis of the way in which tariffs might correct a deficit on the current account of the balance of payments. Up to 4 marks. • For evaluative comment on the relative merits of each and which is better. Up to 4 marks.