Cambridge A Level Economics 9708 — 2015 May/June Paper 2 · Variant 2

This document consists of 4 printed pages and 1 Insert. DC (SJF/CGW) 97084/3 © UCLES 2015 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 3 3 8 2 9 0 2 9 9 3 * ECONOMICS 9708/22 Paper 2 Data Response and Essay (Core) May/June 2015 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 9708/22/M/J/15 © UCLES 2015 Section A Answer this question. 1 Economic prospects reverse in Latin America Over the past decade, Brazil boomed and grew rich by selling raw materials to China. Brazil’s economy averaged 3.6% annual growth, peaking at a rate of 7.5% in 2010. Its currency, the Brazilian Real, substantially increased in value. By comparison, Mexico saw lower growth, partly because it was tied to a faltering United States (US) economy. Mexico also suffered from deep problems of its own, for example, a poor education system and a rise in violent crime, deterring tourists and investors. Mexico’s economy averaged 2.6% annual growth over the past decade, while its currency, the Mexican Peso, fell slightly in value. From 2011, it was Brazil’s turn to struggle as China’s demand for its raw materials decreased. In 2013 alone, Brazil’s currency depreciated by more than 10%. The Brazilian Government largely wasted the boom years, investing little in roads and other infrastructure that could have supported its development. In addition, many households borrowed money to finance a consumer boom including a rapid rise in imports of luxuries from the US. As a result, a significant trade deficit in goods and services developed. Meanwhile, the Mexican Government used the past decade to significantly strengthen its economy, improving the education system and making its telecommunications, financial and energy sectors more efficient. Economists now expect the country to grow more rapidly when Mexico’s biggest trading partner, the US, recovers economically. Also, Mexico exports manufactured goods to a growing European market. At the same time, Mexico has maintained a relatively small trade deficit that can be financed easily by long-term foreign investment in its companies and factories. Source: The Wall Street Journal, September 2013

3 9708/22/M/J/15 © UCLES 2015 [Turn over Fig. 1: A Tale of Two Countries 0.5 0 2003 2005 2010 2013 1.0 1.5 2.0 Gross Domestic Product in US$ (trillion) Percentage change in how many US$ each currency buys (%) 2.5 Brazil 3.0 0 –25 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 25 50 75 100 Mexico Brazilian Real Mexican Peso Sources: IMF (GDP); (The Wall Street Journal) Market Data Group (a) Use production possibility curves to compare Brazil’s economy in 2013 with its economy in 2003. [2] (b) (i) Using Fig. 1, explain what has happened to the value of the Brazilian Real in 2013 compared with 2004. [2] (ii) Explain one possible reason for the stability of the Mexican Peso from 2004 to 2008 shown in Fig. 1. [2] (iii) With the help of diagrams, explain how the different economic experiences of Brazil and Mexico after 2011 mentioned in the text could explain the changes in currency values shown in Fig. 1. [4] (c) Explain how the approach of the Mexican Government ‘during the past decade’ is more likely to generate an expansion of the economy than the approach of the Brazilian Government during this period. [4] (d) Identify and evaluate the usefulness of any further information that might be helpful in assessing the future prospects of the Brazilian and Mexican economies. [6]

4 9708/22/M/J/15 © UCLES 2015 Section B Answer one question. 2 (a) Explain how economists measure the way in which demand for a good changes when income changes and, with the help of a diagram, show why some goods are classified as ‘inferior goods’. [8] (b) Discuss how useful governments might find the concepts of price and income elasticity of demand when setting economic policy. [12] 3 (a) Using examples, explain the difference between merit goods and public goods and show why it is possible for profit to be made in the supply of one of these types of good but not the other. [8] (b) Discuss why merit goods are undersupplied in a free market economy and consider the effectiveness of one policy to deal with this problem. [12] 4 (a) Explain how a declining exchange rate and a high rate of inflation in an economy might affect that economy’s terms of trade. [8] (b) Discuss the advantages and disadvantages to an economy of a fall in that economy’s terms of trade and consider whether the overall effects are likely to be beneficial. [12] 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. To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge International Examinations Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download at www.cie.org.uk after the live examination series. 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.

® IGCSE is the registered trademark of Cambridge International Examinations. CAMBRIDGE INTERNATIONAL EXAMINATIONS Cambridge International Advanced Subsidiary and Advanced Level MARK SCHEME for the May/June 2015 series 9708 ECONOMICS 9708/22 Paper 2 (Data Response and Essay), 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 2015 series for most Cambridge IGCSE®, Cambridge International A and AS Level components and some Cambridge O Level components.

Page 2 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 22 © Cambridge International Examinations 2015 1 (a) Use production possibility curves to compare Brazil’s economy in 2013 with its economy in 2003. [2] The Brazilian economy has grown between 2003 and 2013. Candidates should provide a diagram of a production possibility curve shifting outwards. For a diagram of the ppc with appropriate axes, accurately labeled (1). For an indication of the outward shift of the ppc as the Brazilian economy has grown (1). (b) (i) Using Fig.1, explain what has happened to the value of the Brazilian Real in 2013 compared with 2004? [2] It has appreciated/risen/increased/is higher etc. (1) by approximately 25%(23%-27%) Accept answers in the region of 50% (46%-51%) (1) Do not award the second mark for confused attempts that calculate the change using invalid units. (ii) Explain one possible reason for the stability of the Mexican Peso from 2004 to 2008 shown in Fig. 1. [2] A number of reasons are acceptable. For example intervention by the Mexican authorities in the foreign exchange market. Or answers could be based upon the information provided in the extract i.e. the small trade deficit that can be financed easily…. For maximum marks there must be some reference to the supply and demand for the Mexican currency. (up to 2 marks) (iii) With the help of diagrams, explain how the different economic experiences of Brazil and Mexico after 2011 mentioned in the text could explain the changes in the currency values shown in Fig. 1. [4] The changes in the currency values are a reflection of changes in the supply and demand for the Brazilian Real and the Mexican Peso. For an explanation of the reasons for the depreciation of the Brazilian currency with due reference to the text. (Up to 2 marks (no diagram 1 max)) A number of approaches are acceptable: There has been a decline in China’s demand for Brazil’s raw materials and as a result a decline in the demand for the Real. There has been a rapid rise in imports of luxuries from the US into Brazil and therefore an increase in the supply of the Real. A significant trade deficit in goods and services has developed that means that the supply of Real exceeds its demand. If reference is made to ‘the waste of the boom years’ the candidate needs to go on to show how this affects the value of the Real through the impact upon the supply and the demand for the currency. For an explanation of why Mexico’s currency is relatively more stable or one that explains the rise in the Peso after 2012 with due reference to the text. (Up to 2 marks (no diagram 1 max)) A number of approaches are acceptable: A ‘relatively small trade deficit that can easily be financed…….’ means that there is not

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 22 © Cambridge International Examinations 2015 a great excess supply or demand for the Peso. If reference is made to the Mexican government’s policy that has ‘significantly strengthened its economy’ the candidate needs to go on to show how this would prevent a large trade deficit from arising. (c) Explain how the approach of the Mexican government ‘during the past decade’ is more likely to generate an expansion of the economy than the approach of the Brazilian government during this period. [4] In Mexico improving the education system and making the various sectors mentioned more efficient has improved the productivity of the factors of production and lead to an expansion of the economy. In Brazil, the government ‘wasted the boom years’ failing to invest in infrastructure. Candidates need to show understanding of the link between the actions of the two governments and the supply side of their economies. A further acceptable approach is to analyse the impact of the Mexican government’s policy on aggregate demand in Mexico. For an explanation of the way in which the policies of the Mexican government would lead to an expansion of the Mexican economy through an improvement in the quality of Mexico’s factors of production or for an explanation of the impact upon aggregate demand of increased Mexican government spending. (up to 3 marks) For a comparative statement referring to the Brazilian government’s failure to invest in its resources and/or fail to boost aggregate demand. (1) (d) Identify and evaluate the usefulness of any further information that might be helpful in assessing the future prospects of the Brazilian and Mexican economies. [6] Further information that might be useful includes demographic factors, inflation and unemployment rates and the policies of the two governments. Good answers might use the information on each economy included in the data. For example, it is clear that Mexico’s prospects are linked to the United States so information on the US economy would be useful. Also, in the past, Brazil has been dependent upon demand for raw materials from China. The future prospects of Brazil therefore will depend upon economic activity in China. Candidates might suggest a wide range of factors that would be helpful or alternatively might provide a detailed explanation of only one factor. Either approach is acceptable, but it is insufficient to simply identify further information without explaining why it might be helpful. If further information that might be useful is identified but not explained then this can be awarded a maximum of 1 mark. For identification (1 mark), explanation (up to 3 marks) and evaluation (up to 2 marks) of the factors that would be helpful in assessing the future prospects of these economies. (6 marks maximum)

Page 4 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 22 © Cambridge International Examinations 2015 Essays 2 (a) Explain how economists measure the way in which demand for a good changes when income changes and, with the help of a diagram, show why some goods are classified as ‘inferior goods’. [8] For knowledge and understanding of income elasticity of demand (up to 4 marks) Definition of income elasticity: (1) Formula: Up to 2 marks (Some inaccuracy e.g. no reference to %: 1 mark) For some development of the concept e.g. explanation of elastic/inelastic or meaning of normal good: (1) For application using a diagram to show how goods are classified as inferior. (up to 4 marks) For clear explanation of inferior good (definition 1 mark, negative value of yed 1 mark) For an accurate, correctly labelled diagram illustrating an inferior good (up to 2 marks). (b) Discuss how useful governments might find the concepts of price and income elasticity of demand when setting economic policy. [12] Price elasticity is useful to governments because it measures the change in demand when price changes. This helps governments in a number of ways. For example, it helps to predict revenues from indirect taxes, it can be used to estimate the change in the consumption of demerit goods when taxes are imposed and also the extent of any price fall when a good is subsidised. Income elasticity of demand can be used by governments to predict the impact on regions that specialise in goods or services that are sensitive to income changes. It can also be used to assess the impact of changes in income tax. Which is most useful might depend upon the policy aims of the government or whether incomes are stable or changing. For analysis of the usefulness of both price and income elasticity to governments when setting economic policy (up to 8 marks). For analysis of the usefulness of price elasticity of demand (up to 6 marks). For analysis of the usefulness of income elasticity of demand (up to 6 marks). If the candidate discusses the usefulness of these concepts to firms with no reference to governments then no marks will be awarded for analysis. (Up to a maximum of 8 marks for analysis) For evaluative comment on which concept might be most useful (up to 4 marks).

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 22 © Cambridge International Examinations 2015 3 (a) Using examples, explain the difference between merit goods and public goods and show why it is possible for profit to be made in the supply of one of these types of good but not the other. [8] For knowledge and understanding of both merit goods and public goods with appropriate examples (up to 4 marks). For an accurate definition of merit goods in terms of under-consumption through information failure (accept positive externalities), with an appropriate example. No example or incorrect example, 1 maximum (2). For an accurate definition of public goods in terms of non-excludability and non-rivalry, with an appropriate example. No example or incorrect example, 1 maximum (2). For application to show why profit could be made in supplying merit goods, but not public goods (up to 4 marks). The answer should be based upon the fact that public goods are non-excludable and this gives rise to the free rider problem meaning that no price can be charged. As result entrepreneurs cannot make a profit in the supply of public goods (up to 2 marks). Merit goods are excludable and as a result a price can be charged so that entrepreneurs will produce the good in pursuit of profit (up to 2 marks). (b) Discuss why merit goods are under supplied in a free market economy and consider the effectiveness of one policy to deal with this problem. [12] Merit goods are undersupplied in a free market economy because of information failure. They are undervalued by consumers so the demand for them is less than it would be if the value was fully understood. Policies include subsidies, educational campaigns and state provision. Each has disadvantages such as cost and the length of the time period before the impact is felt. For analysis of the under-provision of merit goods and an appropriate policy to deal with the problem (up to 8 marks). Explaining why they are undersupplied and why a policy is needed (up to 4 marks). Explanation of any one policy to deal with this (up to 4 marks). For evaluation of the effectiveness of the policy analysed. (up to 4 marks)

Page 6 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 22 © Cambridge International Examinations 2015 4 (a) Explain how a declining exchange rate and a high rate of inflation in an economy might affect that economy’s terms of trade. [8] For knowledge and understanding of the terms of trade, a declining exchange rate and a high rate of inflation (up to 4 marks). Terms of trade. Definition 1 mark, formula 1 mark (up to 2 marks). A declining exchange rate. Candidates might demonstrate understanding of this through application. (1) A high rate of inflation. Candidates might demonstrate understanding of this through application. (1) For application showing how both a declining exchange rate and a high rate of inflation would affect the terms of trade of an economy (up to 4 marks). Impact of a declining exchange rate (up to 2 marks). Impact of a high rate of inflation (up to 2 marks). (b) Discuss the advantages and disadvantages to an economy of a fall in that economy’s terms of trade and consider whether the overall effects are likely to be beneficial. [12] A fall in an economy’s terms of trade can result from a number of changes in the price of exports and imports. The effect is that the price of exports has fallen relative to the price of imports. This has advantages, such as the fact that exports are now more competitive and this might boost exports and increase employment in export reliant industries. Similarly, imports are now more expensive and this should see a fall in imports and an impact upon domestic industries. Disadvantages include the fact that demand-pull and cost-push pressures on prices might be experienced. The overall effects depend upon a range of factors such as the price elasticity of demand for exports and imports and the price elasticity of supply of exports. For analysis of the advantages of a fall in the terms of trade (up to 6 marks). For analysis of the disadvantages of a fall in the terms of trade (up to 6 marks). (Up to a maximum of 8 marks for analysis) For an evaluation of whether an unfavourable movement would, on balance be beneficial (up to 4 marks).