Cambridge A Level Economics 9708 — 2017 Feb/March Paper 2 · Variant 2

* 8 7 1 4 8 0 8 8 3 6 * This document consists of 3 printed pages, 1 blank page and 1 Insert. DC (CW) 132058/2 © UCLES 2017 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level ECONOMICS 9708/22 Paper 2 Data Response and Essay February/March 2017 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 Question 1. Brief answers only are required. Section B Answer 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/F/M/17 © UCLES 2017 Section A Answer this question. 1 Concern in Vietnam over trade with China Table 1: The Value of Vietnam’s Trade in Goods with Selected Trading Partners: January–July 2014 United States China Japan South Korea Germany Exports of Goods (US$ billion) 15.9 8.6 8.5 3.7 2.9 Imports of Goods (US$ billion) 3.7 23.7 6.9 12.2 1.4 Source: Vietnam Customs Tycoon to the rescue as cheap Chinese goods overwhelm Vietnam’s economy Vietnam is enjoying rapid growth but its small businesses are being overwhelmed by a huge influx of cheap, mass-produced goods from China. These goods are undercutting the prices of domestically produced items. A Vietnamese entrepreneur has a rescue plan designed to support new business start-ups. He has spent US$27 million developing his V+ shopping mall. He is now offering new businesses rent-free 50-year leases in the mall, which is located in Hanoi – as long as they sell only Vietnamese-made products. He is also urging the Vietnamese government to introduce this idea nationwide to prevent the closure of tens of thousands of businesses each year and encourage customers to buy Vietnamese products. “China exports to the world at very, very low prices and that’s put huge pressure on the Vietnamese economy,” he explained. “I’m a businessman, I understand why firms can’t develop. Without this kind of support, Vietnamese businesses will perish.” China’s recent devaluation of its currency, the yuan, triggered fears of China overwhelming Vietnam with even cheaper goods. As a result, Vietnam’s central bank devalued the Vietnamese currency, the dong. Despite the Vietnamese dislike of Chinese products, their prices make them unavoidable when Vietnamese businesses lack funds and household budgets are modest. There have been calls for boycotts of Chinese goods but they have all failed miserably. An economist at the Asian Development Bank, however, said the V+ concept showed good intentions but the government should only support firms with the potential to compete. “There needs to be a change in the government’s policy,” he said. “It needs to move away from subsidies for all goods towards targeted subsidies for industries with the potential to compete.” Source: Martin Petty, The Times, 18 April 2015

3 9708/22/F/M/17 © UCLES 2017 (a) (i) State the country shown in Table 1 that has the greatest deficit on its balance of trade in goods with Vietnam. [1] (ii) Identify the three other components of the balance of payments that would allow you to calculate the current account balance of Vietnam with that country. [3] (b) Explain any two factors that would determine the impact of China’s decision to devalue the yuan upon Vietnam’s trade with China. [4] (c) Explain how subsidies for all Vietnamese goods and a boycott of Chinese goods are expected to help Vietnamese goods to compete with Chinese goods. Use supply and demand diagrams to support your answer. [6] (d) Discuss whether the principle of comparative advantage would justify the support of Vietnam’s government for the development of all industries in Vietnam or just those that have the potential to compete. [6] Section B Answer one question. 2 (a) Explain the difference between public goods and private goods. Consider why profit can be made through the supply of one type of good, but not the other. [8] (b) Discuss why merit goods may be under-consumed in a mixed economy. Consider whether maximum prices or education campaigns would be more effective in ensuring that these goods are supplied in appropriate quantities. [12] 3 (a) Explain the factors that are likely to make the supply of a product relatively price inelastic. [8] (b) Discuss the ways in which businesses might attempt to increase the price elasticity of supply of their products. Assess whether these attempts are likely to be successful. [12] 4 (a) Explain what is used as money in a modern economy. Consider how an increase in the money supply can cause inflation. [8] (b) Discuss the consequences of high inflation. Consider whether the internal consequences can ever be more serious than the external consequences in an economy that has extensive foreign trade. [12]

4 9708/22/F/M/17 © UCLES 2017 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. BLANK PAGE

® IGCSE is a registered trademark. This document consists of 7 printed pages. © UCLES 2017 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level ECONOMICS 9708/22 Paper 2 Data Response and Essay March 2017 MARK SCHEME Maximum Mark: 40 Published 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 March 2017 series for most Cambridge IGCSE®, Cambridge International A and AS Level components and some Cambridge O Level components.

9708/22 Cambridge International AS/A Level – Mark Scheme PUBLISHED March 2017 © UCLES 2017 Page 2 of 7 Question Answer Marks Guidance 1(a)(i) The United States (1 mark) 1 1(a)(ii) Services, or Invisibles (1 mark) Primary income (or Investment income, or Interest, Profits and Dividends) (1 mark) Secondary income or Transfers (1 mark) 3 If the candidate provides details on one component e.g. interest, profits and dividends this is not considered as three components and can score 1 mark maximum. 1(b) For identification of a relevant factor (1 mark) For explanation of this factor (1 mark) (2 marks maximum per factor) Please use the textbox to show the allocation of marks to each part of the question. 4 The factors include: • the price elasticity of demand for China’s exports to, and imports from, Vietnam: i.e. whether the Marshall-Lerner condition is satisfied • the time period under consideration i.e. the J-Curve • the price elasticity of supply of China’s exports • whether the devaluation of the Dong offsets the devaluation of the yuan • tariffs, quotas and other forms of protectionism if these are increased or imposed in response to the devaluation of the yuan • the relative rates of inflation in Vietnam and China

9708/22 Cambridge International AS/A Level – Mark Scheme PUBLISHED March 2017 © UCLES 2017 Page 3 of 7 Question Answer Marks Guidance 1(c) For a diagram: 1 mark for correct shift of curve and 1 mark for the change in equilibrium price and quantity (up to 2 marks) and explanation (1 mark) of the expected help as a result of subsidies for all Vietnamese goods. (Up to 3 marks) For a diagram: 1 mark for correct shift of curve and 1 mark for the change in equilibrium price and quantity (up to 2 marks) and explanation (1 mark) of the expected help as a result of the boycott of Chinese goods. (Up to 3 marks) No diagram: 2 marks maximum Please use the textbox to show the allocation of marks to each part of the question. 6 The diagram should show an increase in the supply of Vietnamese goods as a result of the subsidy and a fall in their price. An explanation should also accompany this diagram. The diagram should show a decrease in the demand for Chinese goods or an increase in demand for Vietnamese goods in the case of a boycott. A diagram showing both an increase in supply and a decrease in demand for Chinese goods/increase in demand for Vietnamese goods is an acceptable approach.

9708/22 Cambridge International AS/A Level – Mark Scheme PUBLISHED March 2017 © UCLES 2017 Page 4 of 7 Question Answer Marks Guidance 1(d) For a clear understanding of the Principle of Comparative Advantage with due reference to lower opportunity cost. (1 mark) For application of the Principle of Comparative Advantage: • showing how the principle can be used to justify support for infant industries (Up to 3 marks) • showing how the principle does not justify support for industries that lack the required potential (Up to 3 marks) (4 marks maximum for application) If the candidate justifies support without reference to the principle of comparative advantage then 2 maximum for application For a reasoned conclusion with reference to the principle of comparative advantage (1 mark) Please use the textbox to show the allocation of marks to each part of the question. 6 The Principle of Comparative Advantage states that countries should specialise in the production of those goods that they can produce at the lowest opportunity cost. Those goods that have the ‘potential to compete’ could be considered as infant industries and they are the ones that could develop the lowest opportunity cost. Economic theory suggests that these industries should be supported.

9708/22 Cambridge International AS/A Level – Mark Scheme PUBLISHED March 2017 © UCLES 2017 Page 5 of 7 Question Answer Marks Guidance 2(a) For knowledge and understanding of • public goods in terms of non-excludability and non-rivalry (Up to 2 marks) and • private goods in terms of excludability and rivalry in consumption (Up to 2 marks) For application showing why profit can be made in the supply of private goods (Up to 3 marks) but not in the supply of public goods because of the free-rider problem that means that a price cannot be charged (Up to 3 marks). (4 marks maximum for application) 8 Public goods, in contrast to private goods, are non-excludable and non-rival (and non-rejectable). As a result if they were provided by the private sector there would be the free-rider problem meaning that no profit could be made from their provision. 2(b) For analysis: • explaining how maximum prices might work to increase provision with due reference to the strengths and weaknesses of this approach. (Up to 6 marks) • explaining how education campaign might work to increase provision with due reference to the strengths and weaknesses of this approach. (Up to 6 marks) (8 marks maximum for analysis) For evaluation assessing which is the most effective in increasing consumption with due reference to the strengths and weaknesses explained in the analysis. (Up to 3 marks) and providing a reasoned conclusion (1 mark) 12 Merit goods are under-consumed because of incomplete information. The question relates to the under-consumption of merit goods and successful answers will focus upon the way in which policies can increase consumption as required. References to price are only relevant as they relate to the quantity consumed. Maximum prices set the price of the merit good below equilibrium so that the merit good becomes more affordable. This will make consumers more willing to buy, but a shortage will develop so quantity consumed will actually fall unless the government takes further action such as subsidising production. Education campaigns are designed to improve information and as a result increase the demand for the merit good, raising price and leading to an extension in supply. The weakness of this method is that these campaigns tend to be expensive and they may not be successful if poorly designed.

9708/22 Cambridge International AS/A Level – Mark Scheme PUBLISHED March 2017 © UCLES 2017 Page 6 of 7 Question Answer Marks Guidance 3(a) For knowledge and understanding of the concept of price elasticity of supply For an accurate formula (Up to 2 marks) (If no formula then allow 1 mark for an understanding of what the concept measures) For some elaboration e.g. distinction between elastic and inelastic (Up to 2 marks) (4 marks) For application to show the reasons for the inelasticity of supply of a product. For any one factor explained (Up to 3 marks) So at least 2 factors explained required for full marks for application. (4 marks maximum for application) 8 The supply of a product might be inelastic because: • it has a long production period • There are few available to supply from stock • There is a shortage of resources required to produce it • The time period under consideration is also relevant and can exacerbate the above 3(b) For analysis of measures that might be taken by businesses to increase the elasticity of supply • For explaining any one way in which businesses might attempt to increase the elasticity of supply and an assessment of the strengths and weaknesses of this approach (Up to 6 marks) (8 marks maximum for analysis) For evaluation assessing whether the measures taken are likely to be successful with due reference to the strengths and weaknesses explained in the analysis. (Up to 3 marks) and reaching a conclusion on whether any are likely to be successful (1 mark) 12 Candidates should consider the causes of inelasticity and suggest ways in which businesses might attempt to counteract each one. For example, they might increase stocks so that supply can be increased form stock when prices rise. Evaluative comment might be that this is expensive and impractical for certain products. Another method is increasing the required resources for example training labour. Again this might prove expensive and be impractical if the economy is at full employment. Since this relates to businesses rather than government subsidies or other government policies are not relevant. Measures that increase the quantity supplied rather than the elasticity of supply should not be credited.

9708/22 Cambridge International AS/A Level – Mark Scheme PUBLISHED March 2017 © UCLES 2017 Page 7 of 7 Question Answer Marks Guidance 4(a) For knowledge and understanding of what is used as money in a modern economy (Up to 4 marks) For a statement of what money is in terms of general acceptability in settlement of debt (1 mark) For an explanation of what acts as money in a modern economy. Cash and bank deposits. (Up to 3 marks) No reference to bank deposits maximum of 2 marks. For application showing how an increase in the money supply can cause inflation. (4 marks) 8 Candidates should make reference to cash and bank deposits. There should be some understanding of the various forms of near money. The Quantity Theory of Money is not necessary but can be credited. Candidates should describe how an increase in the money supply can trigger spending and cause demand-pull inflation. 4(b) For analysis that explains • The internal consequences of inflation (Up to 6 marks) • The external consequences of inflation (Up to 6 marks) (8 marks maximum for analysis) For evaluation assessing the circumstances under which the internal consequences might be more serious for an open economy (3 marks) and including a conclusion regarding whether this is likely to occur (1 mark) (4 marks maximum) 12 The internal consequences include the haphazard re- distribution of income, the negative impact upon savings and investment, shoe-leather costs and menu costs. The external consequences are that the goods of the economy that experiences inflation will become uncompetitive with consequences for that economy’s balance of payments and exchange rate. The external consequences might be less serious if the rate of inflation in an economy is lower than that in competitor nations. Also, the impact of the inflation might be offset by a decline in the exchange rate.