Cambridge A Level Economics 9708 — 2014 May/June Paper 2 · Variant 1

This document consists of 3 printed pages, 1 blank page and 1 insert. DC (NF) 81118/3 © UCLES 2014 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 0 2 0 5 2 9 8 6 2 3 * ECONOMICS 9708/21 Paper 2 Data Response and Essay (Core) May/June 2014 1 hour 30 minutes No Additional Materials are required. READ THESE INSTRUCTIONS FIRST An answer booklet is provided inside this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. 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. The number of marks is given in brackets [ ] at the end of each question or part question.

2 9708/21/M/J/14 © UCLES 2014 Section A Answer this question. Problems put the brakes on India’s economic growth 1 With developed economies heavily in debt, the ability of the BRICs (Brazil, Russia, India and China) to drive the global economic engine is increasingly in doubt. China’s growth has slowed to its lowest rate in three years. Brazil’s growth has decreased and Russia is heavily dependent on oil and energy prices, which are falling. India’s growth has slowed but is still high by the standards of developed countries, though well below the levels required to maintain economic momentum and improve the living standards of its citizens. However, there are still positives in the Indian story. There is a youthful population, a large domestic demand and high savings. But India’s economic difficulties, including its weak international position and inadequate infrastructure, threaten to overwhelm the country’s potential. In critical sectors such as power, transport and utilities more investment is needed, and although its workforce is young and growing, there is a shortage of skills. The country is running a current account deficit of more than 3% of GDP. The cause is slowing exports as a result of weakness in India’s trading partners and higher imports, mainly purchases of commodities and oil (India imports around 75% of its crude oil). In addition, India has a weak external position. It has around US$ 270bn in currency reserves. But foreign debts that must be repaid in the current year are about 40–45% of this amount. Source: Adapted from The Independent Table 1: Selected Economic Indicators for India 2007–2013 2007 2008 2009 2010 2011 2012* 2013* Gross Domestic Product % change 10.0 6.9 5.9 10.1 6.8 4.9 6.0 Inflation Index 2001=100 130.7 141.7 157.1 175.9 191.5 211.1 231.5 Current Account Balance US$ billion (bn) −8.08 −30.97 −25.91 −52.22 −62.75 −74.54 −69.07 Exchange Rate: Indian Rupees per US$ 41.3 43.5 48.3 45.7 46.6 52.1 52.9 *Forecast Source: The World Bank and other international organisations

3 9708/21/M/J/14 © UCLES 2014 (a) (i) Calculate the rate of inflation in India between 2001 and 2011. [1] (ii) Calculate the expected rate of inflation in India between 2011 and 2013. [1] (b) With the use of a production possibility curve explain the opportunity cost to India of choosing to produce transport facilities rather than education services. [4] (c) Explain how the provision of improved transport facilities and education services might develop the productive potential of the economy in India. [4] (d) India’s exchange rate depreciated between 2010 and 2011. With reference to the data explain, using supply and demand analysis, what might have contributed to this change in India’s exchange rate. [4] (e) Given the changes in the exchange rate shown in Table 1 between 2010 and 2013, discuss whether the changes in the current account balance over this period are what economic theory predicts. [6] Section B Answer one question. 2 (a) Explain whether you would expect the price elasticity of supply of an agricultural product, such as rice, in a market to be elastic or inelastic. [8] (b) Discuss the extent to which a government can increase the supply of an agricultural product to an economy in the short-run and in the long-run. [12] 3 (a) Explain the difference between private goods and public goods, and why it is possible for a business to make a profit in the supply of private goods but not in the supply of a public good. [8] (b) Discuss the view that a market economy is always preferable to a planned economy because of the existence of the price mechanism. [12] 4 (a) Explain what is meant by the term ‘money’ and outline its characteristics in a modern twenty-first century economy. [8] (b) Discuss whether money is able to perform all of its functions in an economy that is experiencing a high rate of inflation. [12]

4 9708/21/M/J/14 © UCLES 2014 BLANK PAGE Copyright Acknowledgements: Question 1 © Satyajit Das; Problems galore put the brakes on India’s economic potential; The Independent; 06 November 2012. 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. 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 2014 series 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 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 2014 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 2014 9708 21 © Cambridge International Examinations 2014 Data Response Questions 1 (a) (i) Calculate the rate of inflation in India between 2001 and 2011. [1] 91.5% (1 mark) Accept no other answer There is no need to refer to % (ii) Calculate the expected rate of inflation in India between 2011 and 2013. [1] 20.9% (1 mark) Accept any answer between 20.8 and 21.0 There is no need to refer to % (b) With the use of a production possibility curve explain the opportunity cost to India of choosing to produce transport facilities rather than education services. [4] For a correctly constructed PPC with axes labelled appropriately. (up to 2 marks) Accept a straight line PPC. For accurate illustration of opportunity cost with a definition of concept. (up to 2 marks) It is not necessary to show a movement along the PPC, as long as the understanding of the underlying concept is clear. (No diagram, a maximum of 2 marks) (c) Explain how the provision of improved transport facilities and education services might develop the potential of the economy in India. [4] Both enhanced transport and education facilities will improve productive capacity in India. This might be illustrated with a shift outwards in the PPC. Transport will improve the market as supply constraints are removed. Enhanced skills provided through education will improve productivity and increase total output. Reward key Economics concepts such as skills, productivity, output, resources, infrastructure, shift outwards of PPC, productive/allocative efficiency. Do not reward very general answers which do not bring in relevant Economics concepts. (up to 4 marks)

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 21 © Cambridge International Examinations 2014 (d) India’s exchange rate depreciated between 2010 and 2011. With reference to the data explain, using supply and demand analysis, what might have contributed to this change in India’s exchange rate. [4] The explanation should be based upon the current account deficit, slowing exports and higher imports. In addition, credit should be awarded for reference to India’s external debts. It should make reference to how these factors affect the supply and demand for the rupee and how a depreciation will result. (up to 4 marks) For an explanation in relation to demand. (up to 2 marks) For an explanation in relation to supply. (up to 2 marks) Other factors to refer to could include a relatively high rate of inflation and a deficit in the current account balance NB A diagram is not actually required. (e) Given the changes in the exchange rate shown in Table 1 between 2010 and 2011, discuss whether the changes in the current account balance over this period is what economic theory predicts. [6] The data shows that the exchange rate has declined, and it would be expected that this would lead to a fall in the price of India’s exports and a rise in the price of India’s imports. This would result in a decrease in the Current Account deficit that is expected to rise by 2013. This depends upon certain factors being present, such as the elasticity of demand for exports and imports being sufficiently elastic to reduce the expected deficit. Reference to the Marshall-Lerner condition and the J-curve effect should be credited here. Other evaluative comment should be awarded with due credit. For the expected impact upon the current account balance. (up to 4 marks) For a discussion indicating why the expected outcome might not occur. (up to 4 marks) (6 marks max) In the marking of Section B answers, please use the T (Text Box) at the end of (a) and (b) to show the mark splits. You can include a comment if you think that it would be helpful.

Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 21 © Cambridge International Examinations 2014 2 (a) Explain whether you would expect the price elasticity of supply of a product, such as rice in a market to be elastic or inelastic. [8] For knowledge and understanding of price elasticity of supply including elastic and inelastic outcomes. (up to 4 marks) Candidates need to show a firm grasp of the concept of price elasticity of supply. The formula is not required, but it is essential that an accurate explanation refers to the formula. The meaning of elastic and inelastic must be accurate for full marks. For application of the factors that determine the coefficient, giving both elastic and inelastic outcomes. (up to 4 marks) Application marks require candidates to demonstrate an understanding of the factors that lead to elastic and inelastic outcomes. These might include a reference to the time period under consideration, the availability of stocks, the availability of surplus capacity and the nature of the good. A good explanation of relevant factors is more important than an explanation of a range of factors. (8 marks total) NB The question refers to ‘a product, such as rice’, but it is not necessary to refer to rice. (b) Discuss the extent to which a government can increase the supply of an agricultural product to an economy in the short-run and in the long-run. [12] For an analysis of the factors that might increase the supply of an agricultural product to an economy in the short-run and in the long-run. (up to 8 marks) The government can adopt a number of policies to increase the supply of agricultural products. These include subsidies, increasing imports through, for example, exchange rate depreciation or bi-lateral trade agreements, increasing factors devoted to agricultural production and so on. For evaluative comment on ‘the extent to which’ element of the question. (up to 4 marks) A number of points can be raised to score evaluative marks. For example, candidates might refer to the inelasticity of supply of agricultural products when appropriate resources in terms of land and labour are absent, so that the extent to which supplies can increase is limited. Accept any attempt to question the effectiveness of policies suggested in the analysis. (max 12 marks) NB The question explicitly refers to the role of a government in increasing the supply of an agricultural product.

Page 5 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 21 © Cambridge International Examinations 2014 3 (a) Explain the difference between private goods and public goods, and why it is possible for a business to make a profit in the supply of private goods but not in the supply of a public good. [8] For knowledge and understanding of the distinction between private and public goods. (up to 4 marks) Candidates need to show a firm grasp of the difference between the types of good in terms of excludability, rejectability and non-rivalry in consumption. A maximum of 2 marks for a list of distinctions that are not explained. For application to explain how it is possible to make a profit providing private goods, but not public goods based upon the free rider problem. (up to 4 marks) Application marks will be awarded for a clear explanation of the free rider problem and why this undermines the ability to make a profit through the fact that no one can be excluded from the consumption of public goods. (b) Discuss the view that a market economy is always preferable to a planned economy because of the existence of the price mechanism. [12] For an analysis of the two types of economy and the role of the profit motive in the free market economy. (up to 8 marks) Candidates should explain the difference between the two types of economy in terms of resource allocation. The role of the factor enterprise in responding to the wants of the consumer through the price mechanism in the market economy should be explained and the role of profit made clear. NB Up to a maximum of 4 marks for a general answer that does not focus on the existence of the price mechanism. For evaluative comment on the ‘always preferable’ aspect of the question. (up to 4 marks) Candidates can score for evaluative comment through an examination of the advantages and disadvantages of the free market economy and the role of the price mechanism in such an economy. Advantages include consumer sovereignty. Disadvantages include the non- provision of public goods and the over provision of demerit goods.

Page 6 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 21 © Cambridge International Examinations 2014 4 (a) Explain is meant by the term ‘money’ and outline its characteristics in a modern 21st century economy. [8] For knowledge and understanding of the meaning of the term ‘money’ (up to 4 marks) Candidates need to show a good understanding of what is meant by ‘money’. A definition is expected for a good mark. For application explaining the characteristics of money in a modern economy. (up to 4 marks) Candidates need to focus on what acts as money in a modern economy, and it is essential that reference be made to forms of money other than cash. It is also essential that bank deposits and the transfer of these deposits in a modern society, for example cheques and debit cards, are explained, for a good mark. Up to a maximum of 4 marks if there is no reference to bank deposits and the role of electronic money, given explicit reference to modern 21st century economy in question. (b) Discuss whether money is able to perform all its functions in an economy that is experiencing a high rate of inflation. [12] For analysis showing how the functions of money are affected by a high rate of inflation. (up to 8 marks). The analysis will include an explanation of the functions and the impact of high inflation on each. For example, medium of exchange, store of value and so on. For evaluative comment on the ‘all its functions’ aspect of the question. (up to 4 marks) Evaluative comment will distinguish how each function is affected by high inflation and whether some functions might continue successfully. For example, the store of value function will be affected by high inflation before the medium of exchange function. But during hyperinflation the medium of exchange function is also affected. So whether functions are affected depends upon the rate of inflation. NB One mark for reference to each of the four functions of money. One additional mark for reference to the effect of inflation on each of these four functions. Some candidates may refer to the functions of money in (a), so be prepared to credit this in the mark given to part (b).