Cambridge A Level Economics 9708 — 2015 Oct/Nov Paper 2 · Variant 3

This document consists of 4 printed pages and 1 Insert. DC (ST) 97185/3 © UCLES 2015 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 9 0 7 9 7 0 7 2 7 4 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) October/November 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 9708/23/O/N/15 © UCLES 2015 Section A Answer this question. 1 EU agreement ‘biggest deal Canada has ever made’ Canada and the European Union (EU) signed the Comprehensive Economic and Trade Agreement (CETA), a free trade deal that will eliminate 98% of all tariffs, and many barriers on trade, investment and labour mobility. Canadian manufacturers, investors and service providers will have access to the 500 million people in the EU, where the total value of production approaches 17 trillion Canadian dollars (C$17 trillion) a year. A study estimates that the duty-free access of Canada’s seafood, timber, manufacturing, agriculture and mineral industries to the EU will generate around C$12 billion in the Canadian economy and create about 80 000 new Canadian jobs. Tariffs on imports from Europe of clothing, cheese, wine, dairy products and many other items would be removed. However, CETA could take two years to come into effect, as it requires the agreement of all EU members and the approval of Canada’s provinces. Canadian dairy farmers are against the agreement. They remain in favour of protection from foreign cheese producers and claim that European cheese will be dumped in the Canadian market. Canadian cheese producers argue that the industry is able to produce high-quality products for Canadian consumers but now this growing industry will face direct competition from cheaper, subsidised European cheese producers. Canadian cheese producers could indeed face difficulties, but the Government would provide compensation to address the negative effects of the agreement on the Canadian dairy industry. But others are optimistic about the agreement, as it will allow Canadian beef and grain to gain new access to European markets. The vice-president of the Canadian Cattlemen’s Association is also hopeful about the new agreement and believes that Canadian beef will be in ‘strong demand’ in the EU. Canadian producers will be able to sell an additional 50 000 tonnes of beef. CETA’s website claims that under the agreement ‘Canada will now be one of the few developed countries in the world to have a guaranteed preferential access to more than 800 million consumers in the world’s two largest economies, the EU and the United States’. Source: CTV News 2013, with files adapted from The Canadian Press

3 9708/23/O/N/15 © UCLES 2015 [Turn over Table 1: Canada’s current account of the balance of payments 2008–2012, C$millions 2008 2009 2010 2011 2012 Total receipts 648 105 511 855 555 594 619 460 629 007 Total payments 646 197 557 605 614 013 667 926 691 222 Table 2: Canada’s trade in goods: principal trading areas – seasonally adjusted, current C$millions December 2012 December 2013 Total exports 38 619 39 722 US 28 576 30 014 EU 3 028 2 640 Total imports 38 635 41 381 US 24 375 27 138 EU 3 257 3 385 Balance of trade in goods –16 –1 659 (a) Compare Canada’s current account balance in 2012 with its balance in 2008. [2] (b) With the help of a diagram, explain how the removal of tariffs on EU goods imported into Canada would affect their price and quantity. [4] (c) How would you decide whether Canada’s cheese producers should be protected from competition from EU cheese producers? [4] (d) Explain, using the theory of comparative advantage, how it is possible for consumers in both the EU and the Canadian economy to benefit from the movement towards free trade. [4] (e) Evaluate any further information that would help you to assess the economic impact of Canada’s trade agreement with the EU. [6]

4 9708/23/O/N/15 © UCLES 2015 Section B Answer any one question. 2 (a) Explain the functions of price, enterprise and profit in a free market economy. [8] (b) Discuss whether an outward shift in an economy’s production possibility curve is more likely to occur in a free market economy or a centrally planned economy. [12] 3 Most governments provide both defence and education services. (a) Explain why defence and education services would not be provided in sufficient quantities if the government did not provide them. [8] (b) Discuss how taxation and subsidies could improve the provision of defence and education services in an economy and consider the likely success of such policies. [12] 4 (a) Explain how an increase in the quantity of money in an economy and a decline in an economy’s exchange rate can both cause inflation. [8] (b) Discuss the impact of a high rate of inflation on an economy and consider whether reducing inflation should take priority over removing a deficit on the current account of the balance of payments. [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 October/November 2015 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 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 – October/November 2015 9708 23 © Cambridge International Examinations 2015 Data Response 1 (a) Compare Canada’s current account balance in 2012 with its balance in 2008. [2] In 2008 surplus of C$1908 million. (1 mark) In 2012 deficit of C$62215 million. (1 mark) For both marks the terms surplus and deficit must be used. (No reference to ‘million’, 1 mark maximum.) (If the candidate states that a surplus becomes a deficit with no figures, 1 mark maximum.) (b) With the help of a diagram, explain how the removal of tariffs on EU goods imported into Canada would affect their price and quantity. [4] For an appropriate diagram showing the removal of a tariff (up to 1 mark) and the fall in price (1 mark) and the rise in quantity that results. (1 mark) For an accompanying explanation. (1 mark) (c) How would you decide whether Canada’s cheese producers should be protected from competition from EU cheese producers? [4] There are many arguments in favour of protecting Canada’s cheese makers from competition from EU cheese producers. Some would argue that the cheese is being dumped, others that the costs of the unemployment that would arise would be too high. On the other hand, continuing to protect Canada’s cheese makers reduces choice for Canada’s cheese consumers. There are other arguments both for and against continuing protection. For an explanation of any argument(s) that might be used to justify the continuing protection of Canada’s cheese industry. (Up to 3 marks) For an explanation of any argument(s) that might be used against the continuing protection of Canada’s cheese industry. (Up to 3 marks) (d) Explain, using the theory of comparative advantage, how it is possible for consumers in both the EU and the Canadian economy to benefit from the movement towards free trade. [4] For knowledge and understanding of the law of comparative advantage. (Up to 3 marks) For application of the law of comparative advantage in the context of CETA. (Up to 1 mark)

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 23 © Cambridge International Examinations 2015 (e) Evaluate any further information that would help you to assess the economic impact of Canada’s trade agreement with the EU. [6] A range of factors might be relevant such as the rate of exchange between European and the Canadian currency, transport costs, trends in Canadian: US trade, the resources available in each economy and so on. For identification and explanation of the factors that would be useful in assessing the impact of the trade agreement. (Up to 4 marks) For evaluative comment on the factors identified. (Up to 2 marks) (If factors are identified but not explained, 1 mark maximum.)

Page 4 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 23 © Cambridge International Examinations 2015 Essays 2 (a) Explain the functions of price, enterprise and profit in a free market economy. [8] For knowledge and understanding of the role of price, enterprise and profit in a free market economy. (Up to 4 marks) Profit as the reward to enterprise (1 mark), enterprise as the factor that organises the other factors (1 mark) and takes the risk of production (1 mark) and price as the device that signals (1 mark) the wants of consumers. For application showing how enterprise responds to changes in price in pursuit of profit in a free market economy. (Up to 4 marks) Marks should be awarded for the effective demonstration of the way in which prices change and entrepreneurs respond by re-allocating resources in line with consumer wants. (b) Discuss whether an outward shift in an economy’s production possibility curve is more likely to occur in a free market economy or a centrally planned economy. [12] The extent to which free enterprise economies and centrally planned economies generate growth depends upon a range of factors. In free enterprise economies, growth will occur through the activities of entrepreneurs who are in pursuit of profit and who are responding to the wants of consumers. Entrepreneurs will be encouraged to invest in capital goods or human resources to generate profits. Some economies are short of entrepreneurs so growth is inhibited. Whether growth will occur in centrally planned economies depends upon the policies of decision makers. They may choose for example to produce capital goods or consumer goods. This raises the question of whether they are prepared to sacrifice current living standards for future living standards. For analysis showing how growth will occur through choices made in a free market economy. (Up to 6 marks) For analysis showing how growth will occur through choices made in a centrally planned economy. (Up to 6 marks) (8 marks maximum) For evaluative judgement on whether growth is most likely to occur in one rather than another type of economy. (Up to 4 marks) 3 Most governments provide both defence and education services. (a) Explain why defence and education services would not be provided in sufficient quantities if the government did not provide them. [8] For knowledge and understanding and application showing that defence is a public good that will not be provided at all if the government does not provide it because of the free rider problem. (Up to 4 marks) For knowledge and understanding and application showing that merit goods are underprovided if not provided by the government because of incomplete information. (Up to 4 marks)

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 23 © Cambridge International Examinations 2015 (b) Discuss how taxation and subsidies could improve the provision of defence and education services in an economy and consider the likely success of such policies. [12] Taxation could improve the supply of defence and education through providing the necessary funding for these products. Subsidies are more targeted and reduce price and increase quantity of the product. They are appropriate for merit good provision, but inappropriate for public goods because no price is charged. For analysis of the role of taxation and subsidies in improving the provision of defence. (Up to 6 marks) For analysis of the role of taxation and subsidies in improving the provision of education. (Up to 6 marks) (8 marks maximum) For evaluative comment on the likely success of providing defence and education through taxation and subsidies. (Up to 4 marks) 4 (a) Explain how an increase in the quantity of money in an economy and a decline in an economy’s exchange rate can both cause inflation. [8] For knowledge and understanding and application to show how an increase in the money supply can cause inflation. (Up to 4 marks) For knowledge and understanding and application to show how a decline in an economy’s exchange rate can cause inflation. (Up to 4 marks) (b) Discuss the impact of a high rate of inflation on an economy and consider whether reducing inflation should take priority over removing a deficit on the current account of the balance of payments. [12] A high rate of inflation will have both a domestic and external impact upon an economy. The domestic effects include a re-distribution of income and a reduction in productive investment together with menu and shoe leather costs. The external effects are that import and export prices are affected and this can lead to problems in the current account of the balance of payments. A deficit on the current account of the balance of payments can cause problems with the maintenance of the exchange rate and might lead to capital flight if there is a loss of confidence in the economy. Whether reducing inflation should take priority over solving a deficit on the current account of the balance of payments depends upon a range of factors. These include whether the rate of inflation is higher than in competitor countries, the rate of inflation, the size of the current account deficit and so on. For analysis of the impact of inflation on an economy. (Up to 6 marks) For analysis of the impact of a deficit on the current account of the balance of payments on an economy. (Up to 6 marks) (8 marks maximum) For evaluative comment on which economic objective should take priority. (Up to 4 marks)