Cambridge A Level Economics 9708 — 2014 May/June Paper 4 · Variant 2

This document consists of 4 printed pages and 1 insert. DC (NF/JG) 81112/4 © UCLES 2014 [Turn over Cambridge International Examinations Cambridge International Advanced Level * 5 3 8 9 7 3 4 4 9 5 * ECONOMICS 9708/42 Paper 4 Data Response and Essays (Supplement) May/June 2014 2 hours 15 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 Question 1. Section B Answer any two questions. 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 9708/42/M/J/14 © UCLES 2014 Section A Answer this question. 1 Telecommunications in India In India, until the late 1990s the Government held a monopoly on all types of telecommunication (telecom). The industry had a small-sized market. In the twenty-first century the industry switched to private sector ownership. The telecom industry then experienced rapid growth, less restrictive regulations, greater technological developments, reduced costs of equipment and competition. Telecom became one of the major contributors to India’s economic growth and one of the fastest- growing industries in India. When it was in the public sector, the telecom industry recorded only a marginal increase in customers – on average 1.92% a year. After privatisation and the relaxation of regulations, the annual increase reached 36.9% in 2009. By 2009 India was second in the world only to China in terms of wireless network customers. The industry emerged as crucial to India’s economic growth because of its multiplier effect and the fact that it is beneficial to other industries. The contribution of the industry to India’s GDP has more than doubled to 2.83% in 2007 from 1.0% in 1992. Much of this growth was caused by a large increase in cell (mobile) phone customers which grew at a rapid rate from 10 million in 2002 to 392 million in 2009. There is a direct correlation between the growth in cell phone customers and the growth in GDP per capita in developing countries, which tend to have a high percentage of the population living in rural areas. The Indian telecom industry now has intense competition and continuous price wars from a growing number of telecom service providers. The government has been applying suitable fiscal and promotional policies to boost domestic demand to help Indian firms. Fig. 1 The significance of the Telecom Industry to India Increases GDP, government revenues & employment in the country Lowers transaction costs, better access to information, healthcare and educational services. Increases productivity of business through voice and data services Indian Telecom Industry Direct Benefits Indirect Benefits

3 9708/42/M/J/14 © UCLES 2014 [Turn over Table 1: The significance of the Telecom Industry to India 2004–5 2005–6 2006–7 GDP at factor cost (2007 prices) Indian Rupees billion 28 439 32 006 37 175 Total Telecom Revenue Indian Rupees billion 716 867 1053 Contribution of Telecom to India’s GDP 2.52% 2.71% 2.83% Source: http://www.dnb.co.in (a) Table 1 shows GDP at factor cost. What is the difference between GDP at factor cost and GDP at market prices? [2] (b) (i) The extract says that India’s telecom industry was crucial to growth because of its multiplier effect. With the help of a numerical example explain what economists mean by ‘the multiplier effect’. [5] (ii) Use the information to explain how India’s telecom industry had a beneficial effect on the Indian economy. [5] (c) Consider how far the success of India’s telecom industry has been because of the change from public sector monopoly to private sector competition. [8]

4 9708/42/M/J/14 © UCLES 2014 Section B Answer two questions. 2 ‘The analysis of marginal utility as an explanation of consumer equilibrium can only be related to the purchase of one good, cannot be used if incomes increase, and is not applicable if advertising causes a change in tastes. It is, in practice, not a useful guide to consumer behaviour’. Assess this opinion. [25] 3 ‘The profitability of firms is a measure of their efficiency. The higher the profit, the greater the efficiency. High profits should, therefore, be encouraged.’ Do you support this argument? [25] 4 (a) Some top executives and some sports people are paid very high salaries. It is argued that this is inevitable as people are paid the market rate for the job. Use economic analysis to support this opinion. [12] (b) It is argued that the wage determination in imperfect markets leads to exploitation. It is therefore necessary and beneficial if the government intervenes in the determination of wage rates. Discuss whether there is any truth in this argument. [13] 5 It was reported in 2012 that consumers should not be encouraged to save more and reduce their debts. Increased saving would result in a Keynesian ‘paradox of thrift’ which would not help economic growth. Instead consumers should spend money on new purchases. (Source: The Times. 2011) (a) Explain and comment on what is meant by ‘the paradox of thrift’. [12] (b) Discuss what is meant by economic growth and consider whether spending money on new purchases would necessarily help economic growth. [13] 6 (a) Explain the possible causes of unemployment and explain which is responsible for most of the unemployment in your country. [12] (b) ‘When a government wishes to lower unemployment its only method of reducing it is by the use of fiscal policies’. Do you agree with this opinion? [13] 7 (a) Too much labour but not enough capital. Is this the most significant difference between a developing and a developed economy? [12] (b) Discuss whether GDP is a reliable measure of the difference in living standards between developing and developed economies. [13] Copyright Acknowledgements: Question 1 http://www.dnb.co.in/IndianTelecomIndustry/OverviewTI.asp accessed 12.03.12 Question 5 The Times. Times Modern 20.10.11 p5 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 9708/42 Paper 4 (Data Response and Essays – Supplement), maximum raw mark 70 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 42 © Cambridge International Examinations 2014 Section A 1 (a) Table 1 shows GDP at factor cost. What is the difference between GDP at factor cost and GDP at market prices? [2] To obtain market prices from factor cost, add indirect taxes (1) and deduct subsidies. Do not reward ‘add direct tax’ (candidates may present the reverse change by deducting taxes and adding subsidies) (2). (b) (i) The extract says that India’s telecom industry was crucial to growth because of its multiplier effect. With the help of a numerical example explain what economists mean by ‘the multiplier effect’. [5] An explanation of the multiplier effect commenting on change in national income as a result of a change in injection (2), an explanation of numerical example, 1 for formula, 1 for calculation, 1 for impact (3) (5 total). (ii) Use the information to explain how India’s telecom industry had a beneficial effect on the Indian economy. [5] Fig. 1 mentions information access, healthcare, education, and government revenues. Candidates should give an explanation of these effects. The article, and Table 1, also give figures on contribution to GDP. Maximum 3 marks for one well-developed point (5). (c) Consider how far the success of India’s telecom industry has been because of the change from public sector monopoly to private sector competition. [8] It depends how success is measured. Table 1 gives figures on revenues and on subscribers. Competition resulted in price wars, so the service was cheaper. However, the growth of subscribers was crucial for its success and this may be because they had cheaper phones; better technology, spread to rural areas so more business can be undertaken easily. The government still had fiscal policy to encourage the industry – so competition was not the only factor. Other factors not mentioned which could have led to the growth in telecoms include the increase in population, and the increase in income. Maximum 5 marks for one side of the argument, reserve one mark for a conclusion (8).

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 Section B General Comments for section B: The essay questions carry a maximum mark of 25. Try not to 'bunch' marks, but use the whole marking range. If there is any doubt in your mind, give the benefit of doubt to the candidate. The difference in grades should be assessed on the ability of the candidate to demonstrate the various objectives of the examination listed in the syllabus, and not purely on the ability to itemise further facts from the content of the syllabus. Marks should be awarded for the ability to demonstrate that aim (b) of the syllabus has been achieved as well as aim (a) - which refers to content knowledge. It is the objective of the examination, as listed in the syllabus, to assess both these aims. An overall guide for marks for individual questions is given below; these are from a total of 25. They may be applied proportionally, of course, to parts of questions where the total is less than 25: Mark 1–9 (Linked to level one in individual question notes). 1–5 Where the answer is mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context. There will also be substantial omissions of analysis. 6–9 Where the answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped. Basic errors of theory, or an inadequate development of analysis, may be evident. Mark 10–13 (Linked to level two in individual question notes). 10–11 Where there is evidence of an ability to identify facts or some ability at graphs and/or a fair ability to apply known laws to new situations. There should be an accurate although undeveloped explanation of the facts relating to the question, together with an explanation of the theory, and evidence of some ability to discriminate and form elementary judgements. Do not expect a clear logical presentation. There will not be much evidence of the ability to recognise unstated assumptions, nor to examine the implications of a hypothesis, nor of the ability to organize ideas into a new unity. 12–13 Where the answer has a more thorough relevance to the question but where the theory is incompletely explained. Mark 14-17 (Linked to level 3 in individual question notes). 14–15 Where there is a good knowledge of the facts and theory of the question, clear evidence of the ability to use the facts and theory with accurate reference to the question that may have been presented by the candidate with a novel application. There should also be evidence, where appropriate, of the ability to examine the implications of the question, and an attempt to distinguish between facts and value judgements. Clear statements, supported by reasoned arguments, should be given and there should be some attempt at a conclusion to the question. There should be a reasoned structure to the whole answer. Do not expect too many extra illustrative points which are not explicitly referred to in the question, and do not expect too much critical comment on unstated assumptions.

Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 16–17 For an answer showing a well reasoned understanding of the question's requirements and of the relevant theory: the analysis should be sound, though the illustration and development may not be particularly complete. Mark 18–25 (Linked to level 4 in individual question notes). 18–20 Where there is a thorough knowledge of the facts and theory with an excellent ability to describe, explain or analyse this in a precise, logical, reasoned manner. There should be an ability to query some of the assumptions in the question, and there should be clear evidence of an ability to distinguish between fact and value judgements and to draw some conclusions on the matter being discussed. Conclusions should be formed and expressed within a sound and structured answer so that the overall answer is well presented. New illustrations and apposite examples should be introduced as further evidence of an ability to recognise the principles of the question and their application to relevant current situations. 21–25 For an answer which, given the time constraint, could not be improved significantly: it will have a clear analysis, ample illustrations and a good attempt at considered evaluation. Be positive in your marking and award marks for the context of the question without being overly influenced by omissions. Marks should not be deleted for inaccuracies. Corresponding marks for sub- sections: 1 2 3 4 Total Mark 10 1–3 4–5 6–7 8–10 Total Mark 12 1–4 5–6 7–8 9–12 Total Mark 13 1–4+ 5–6+ 7–8+ 9–13

Page 5 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 2 ‘The analysis of marginal utility as an explanation of consumer equilibrium can only be related to the purchase of one good, cannot be used if incomes increase, and is not applicable if advertising causes a change in tastes. It is, in practice, not a useful guide to consumer behaviour’. Assess this opinion. [25] Candidates should consider the argument presented. They should explain the concept of consumer equilibrium and the construction of a demand curve using marginal utility. They should consider whether the theory only relates to one demand curve or whether it can be applied if the shape of the curve changes, or if the curve shifts. They should present a conclusion to the argument [25]. L4 (18–25) For a thorough explanation of equilibrium and utility and a consideration of the argument in the question. A reasoned conclusion should be presented. L3 (14–17) For either a competent but more limited comment on both equilibrium and utility, and a comment about the change in the curve, or a full explanation but little comment on changes in the curve. There should still be some judgement on the conclusion in the question. L2 (10–13) For an undeveloped explanation of equilibrium/utility with very little discussion of changes in the curve. It is likely that no overall comment on the conclusion will be given in the answer. L1 (1-9) For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory. 3 ‘The profitability of firms is a measure of their efficiency. The higher the profit, the greater the efficiency. High profits should, therefore, be encouraged.’ Do you support this argument? [25] Candidates are asked to construct an argument. The elements in the argument must consist of (i) a statement of the meaning of efficiency and whether it is linked to a firm’s profits, (ii) a consideration of whether the assertion is correct that the higher the profit, the greater the efficiency and (iii) whether, therefore, the conclusion in the statement is true [25]. L4 (18–25) For a clear explanation of efficiency, a clear assessment of the assertion in the quote and a reasoned conclusion. L3 (14–17) For a competent explanation which does not fully analyse the meaning of efficiency nor fully explains efficiency and does not fully deal with the assertion concerning the link to profits or changes in profits. There will be some discussion, but the evaluation will not be extensive. L2 (10–13) For an accurate though undeveloped explanation of efficiency, but with very little comment of the link to profits and no conclusion. L1 (1–9) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but will include irrelevancies. Errors of theory or omissions of analysis will be substantial.

Page 6 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 4 (a) Some top executives and some sports people are paid very high salaries. It is argued that this is inevitable as people are paid the market rate for the job. Use economic analysis to support this opinion. [12] Candidates should give an explanation of the factors affecting wage rates. A comment on demand and supply, on marginal productivity, on skills, scarcity, and on rates in competitive industries. In the past we have asked for MRP to get L4, but with this question, MRP is not necessary for answers to achieve L4 [12]. L4 (9–12) For a sound explanation with clear understanding of the principles involved. L3 (7–8) For a competent explanation but with limited development. L2 (5–6) For a general explanation of only some of the factors. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (b) It is argued that the wage determination in imperfect markets leads to exploitation and that it is necessary and beneficial if the government intervenes in the determination of wage rates. Discuss whether there is any truth in this argument. [13] Candidates should discuss whether or how exploitation occurs in imperfect competition. They should then discuss how the wage rate could be fixed to avoid exploitation. This might involve negotiation with a union, with a conciliation tribunal, or with government intervention. A solution may be reached without the need for governments. A conclusion should be presented [13]. L4 (9–13) For a reasoned discussion and a clearly structured answer with sound knowledge of the analysis, and with a conclusion. L3 (7–8) For a discussion, but without such a full development, but still with a conclusion. L2 (5–6) For a limited but acceptable attempt to describe the theory, but without any real development nor any conclusion. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

Page 7 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 5 It was reported in 2012 that consumers should not be encouraged to save more and reduce their debts. Increased saving would result in a Keynesian ‘paradox of thrift’ which would not help economic growth. Instead consumers should spend money on new purchases. (Source: The Times 2011) (a) Explain and comment on what is meant by ‘the paradox of thrift’. [12] An explanation that states that a rise in the proportion saved (mps) in the time of recession will cause aggregate demand to fall and total income – and thus total savings – to fall. The paradox is that what is good for an individual may not necessarily be good for the economy as a whole. However, the paradox may not occur. A fall in demand may cause a fall in prices, which offsets the fall in demand; a rise in savings may cause a rise in bank reserves and increased lending and possibly lower interest rates and increased investment; a fall in demand at home may be compensated for by a rise in exports [12]. L4 (9–12) For a sound explanation of the paradox with a good application to the effect on increases in savings, and an understanding of the critique. L3 (7–8) For an accurate explanation of the paradox but with a more limited comment on the critique. L2 (5–6) For a weak explanation of the paradox and a poor comment on the critique. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (b) Discuss what is meant by economic growth and consider whether spending money on new purchases would necessarily help economic growth. [13] A comment on the meaning of economic growth and its measurement, and a discussion on the effect of increased spending. Extra spending should increase a firm’s revenue, which could allow investment, research, further production and economic growth. However, if there is limited spare productive capacity, extra spending might not result in further output but may instead result in rising prices, or increased imports with consequent effects on the balance of payments and long-term international competitiveness [13]. L4 (9–13) For a reasoned and clear discussion with the analysis logically presented with alternative possible outcomes included with a conclusion. L3 (7–8) For a fair but undeveloped discussion, although still with a conclusion. L2 (5–6) For a limited discussion with little comment, no alternative possible outcomes and/or no conclusion. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies and errors of theory.

Page 8 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 6 (a) Explain the possible causes of unemployment and explain which is responsible for most of the unemployment in your country. [12] An identification of the types of unemployment and a reasoned explanation of what is considered to be the most significant type of unemployment [12]. L4 (9–12) For a sound explanation with a clear understanding of at least four types of unemployment, together with a reasoned account of the most significant. L3 (7–8) For an accurate but more limited explanation with a briefer account of what is considered to be the most significant type. Expect at least four types briefly explained, or three types more fully explained but with a weaker application. L2 (5–6) For a correct but brief explanation of three types of unemployment, not necessarily logically presented; or a fuller explanation of two types with a poor application. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (b) ‘When a government wishes to lower unemployment its only method of reducing it is by the use of fiscal policies’. Do you agree with this opinion? [13] An explanation of fiscal policies, which might increase demand and hence increase employment. There should then be a discussion of alternative monetary or supply-side policies to improve the incentive to work, increase skill provision, training, education – although these may be over a long term [13]. L4 (9–13) For a reasoned and clear discussion, logically presented, dealing with the possible alternatives. A conclusion should be presented. L3 (7–8) For a fair but undeveloped discussion, with limited reference to possible alternatives, but with a conclusion. L2 (5–6) For a limited discussion with little development and no conclusion. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies and errors of theory.

Page 9 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2014 9708 42 © Cambridge International Examinations 2014 7 (a) Too much labour but not enough capital. Is this the most significant difference between a developing and a developed economy? [12] Some developing countries have a large working-age population, but not all this population is trained. It may be still the case that there is a relative abundance of labour to capital. However, distinguishing features are more often expressed in terms of GDP, GDP per capita, productive capacity, structure of industry, standards of living, health, education, sanitation, occupational structure of the population and age structure of the population. [12] L4 (9–12) For a sound description with demonstrated clear understanding of the characteristics, and a clear conclusion. L3 (7–8) For a competent description but with limited development, although there will be some attempt at a conclusion. L2 (5–6) For a general description of only some of the factors, and no conclusion. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (b) Discuss whether GDP is a reliable measure of the difference in living standards between developing and developed economies. [13] A discussion of the usefulness of GDP as an indicator of living standards. Consideration should also be given to other indicators, such as income per head, the distribution of income and other factors, some of which are measured by the HDI and some which are of a more social nature or involve political stability or justice and legal systems. A comment should be provided concerning the difficulties of comparison between different countries due to: culture, climate, subsistence sector, informal economy, distribution of income, exchange rates and purchasing power [13]. L4 (9–13) For a reasoned discussion and clearly structured answer, a full account of the difficulties of comparison and a conclusion. L3 (7–8) For a discussion, but without such a full development and with a less elaborate account of the difficulties of comparison, but still with a conclusion. L2 (5–6) For a limited but acceptable attempt to discuss the relevance of GDP but with limited alternatives and without any conclusion. L1 (1–4) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.