Cambridge A Level Economics 9708 — 2018 May/June Paper 2 · Variant 3

1 The Trans-Pacific Partnership (TPP) – good or bad? In February 2016, the controversial TPP trade deal was finally signed at a ceremony in Auckland, New Zealand. Content removed due to copyright restrictions Imports are mainly vehicle parts, mechanical equipment, petroleum products and a wide range of other non-food items. Source: New York Times, 2 February 2016 Table 1.1: New Zealand’s total trade in goods, with selected TPP partners and China in NZ$(m), year ended June 2015 Exports to Imports from Australia 8 514 6 285 US 5 483 6 081 Japan 2 943 3 413 Singapore 1 078 1 801 Malaysia 982 1 877 Canada 597 598 China 8 267 9 332 All other countries 20 532 19 438 Total trade in goods 48 396 48 825 Source: Global New Zealand – Investment and Travel Profile, 2015 (a) Use Table 1.1 to help you to answer parts (i), (ii) and (iii). (i) With which TPP member did New Zealand have the largest deficit on its trade in goods in the year ended June 2015? Explain your answer. [2] (ii) New Zealand’s balance of trade in goods plus its services balance was estimated at NZ$2400m for the year ended June 2015. Calculate New Zealand’s services balance. [2] (iii) What two other items are needed to calculate New Zealand’s current account balance? [2] (b) Use the principle of comparative advantage to explain why New Zealand is likely to benefit from membership of the TPP. [4] (c) Explain the likely effects of the removal of protection on the incomes of Canada’s farmers. [4] (d) Discuss whether China joining the TPP would be likely to be of overall benefit to existing TPP members. [6]

Mark scheme: 1(a)(i) Malaysia (1 mark) NZ$895 million (1 mark) denominations i.e. NZ$ and millions units. 1(a)(ii) Trade in services is NZ$2400m + NZ$429m = NZ$2829m (2 marks) 2 There is no requirement to show the calculation, but if there is a correct calculation that arrives at the wrong answer 1 mark can be awarded. 1(a)(iii) Primary income (1 mark) Secondary income (1 mark) 2 ‘Old’ terminology is an acceptable alternative i.e. net transfers and investment income. 1(b) For a clear idea that comparative advantage relates to the lowest opportunity cost of production (1 mark) For recognition that comparative advantage is determined by factor endowment (1 mark) For an explanation of how New Zealand’s membership of the TPP will lead to the exploitation of comparative advantage and a better allocation of resources through specialisation and trade (Up to 2 marks) 4 New Zealand has a comparative advantage in lamb and dairy products. Entry into the TPP will allow New Zealand access to a bigger market and through specialisation and trade it will be able to export more of these products and import those goods that it can only produce at higher opportunity cost. 1(c) For explanation of how there might be negative effects upon Canadian farmers incomes (Up to 2 marks) For explanation of how there might be beneficial effects upon Canadian farmers incomes (Up to 2 marks) 4 The most likely outcome is that the Canadian market will be flooded with cheap food imports from other members of the TPP, especially New Zealand. If so, this will reduce prices and the incomes of those farmers who produce similar products. It could also be argued that membership of the TPP provides new opportunities for Canada’s farmers with tariff and quota free access to new markets within the TPP. This could have a positive effect on certain farm incomes. Overall outcome though is uncertain. Question Answer Marks Guidance 1(d) For an explanation of the possible costs: (Up to 3 marks) For an explanation of the possible benefits: (Up to 3 marks) Reserve 1 mark for a reasoned conclusion 6 There are both costs and benefits that could result if China joined the TPP: Possible costs include : the domestic market could be flooded with cheap imports; there might be increased balance of trade deficits, infant industries might be prevented from development and so on. Possible benefits include : tariff free access to the massive Chinese market; increase in scale of production of exporting industries leading to economies of scale and so on. 8 Candidates need to display good knowledge and

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2 In March 2016, the United Kingdom government announced that it will introduce a ‘sugar tax’ on the producers of fizzy soft drinks in order to reduce child obesity. (a) Using an example of each, explain the differences between direct progressive taxes and indirect regressive taxes. [8] (b) Discuss whether a sugar tax or an educational campaign on healthy eating is more likely to reduce child obesity. [12]

Mark scheme: 2(a) For knowledge and understanding and application in the case of direct, progressive taxes (Up to 4 marks) 1 mark for a valid example 1 mark for a clear idea of meaning of ‘direct’ Up to 2 marks for an explanation of a progressive tax For knowledge and understanding and application in the case of indirect, regressive taxes (Up to 4 marks) 1 mark for a valid example 1 mark for a clear idea of meaning of ‘indirect’ Up to 2 marks for an explanation of a regressive tax understanding of the distinction between direct and indirect taxes and taxes that are progressive and regressive. They then need to apply these concepts o provide an example of each type of tax. Question Answer Marks Guidance 2(b) For analysis of the impact of a sugar tax (Up to 4 marks) This should explain the impact of the tax upon supply and make due reference to the significance of the price elasticity of demand. Credit accurate diagrams. For analysis of the impact of an educational campaign (Up to 4 marks) This should explain the impact of the campaign upon the demand curve for ‘fizzy soft drinks’ or similar products. Credit accurate diagrams. (AN: Up to 8 marks maximum) For evaluation as to whether the new tax or an educational campaign is more likely to reduce child obesity with 1 mark reserved for a reasoned conclusion (EV: Up to 4 marks maximum) 12 The imposition of an indirect tax will shift the supply curve to the left raising price and reducing quantity demanded. The impact depends upon the price elasticity of demand for the product. An educational campaign will shift the demand curve for the product to the left. This will reduce price and result in a fall in the quantity demanded. The impact depends upon the effectiveness of the campaign.

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3 In 2015, it was reported that the global demand for chocolate was projected to increase but it was unlikely that the global supply of cocoa beans, required to produce chocolate, would increase. (a) State and explain two factors of production needed for the manufacture of chocolate. Explain the benefits of specialisation in the manufacture of chocolate. [8] (b) Analyse the likely effects on the global price of chocolate of the reported changes in 2015. Discuss the most effective way that the price of chocolate might be stabilised. [12]

Mark scheme: 3(a) For knowledge and understanding of two relevant factors of production in the manufacture of chocolate. Award 1 mark for identification and 1 mark for explanation of how this contributes to the production process. (KU: Up to 4 marks maximum) For an understanding of specialisation and its application to the manufacture of chocolate. For an understanding of specialisation (1 mark) and the division of labour (1 mark) For the benefits of specialisation and the division of labour (Up to 2 marks) (APP: Up to 4 marks maximum) enterprise. Each has a distinct role in the production process. Specialisation occurs when workers are assigned specific tasks within a production process. This is usually called the division of labour. Workers will require less training to be an efficient worker. Therefore this will lead to an increase in labour productivity and firms will be able to benefit from economies of scale and increased efficiency. No knowledge of chocolate manufacture is required for full marks on this question. 3(b) For an analysis of the impact of the increase in demand and the likely fixed supply on the market for chocolate in terms of price and quantity traded (Up to 2 marks) For an analysis of how the price may be stabilised with reference to the difficulties. (Up to 6 marks) (AN: Up to 8 marks maximum) For an evaluation of the most effective way of stabilising the price of chocolate with 1 mark reserved for a reasoned conclusion. (EV: Up to 4 marks maximum) 12 An increase in demand with a relatively fixed supply will result in a rise in price with no or little extension in supply. The supply will be highly inelastic or perfectly inelastic. Price can be stabilised through a maximum price that might be made effective through buffer stocks. This has several problems including cost and problems of storage.

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4 (a) Explain the main causes of changes in the general price level in your country, or any other country with which you are familiar. [8] (b) Discuss whether monetary policy alone is the best way for a government to correct inflation. [12]

Mark scheme: 4(a) For an knowledge and understanding and application of cost-push inflation (Up to 6 marks) For an knowledge and understanding and application of demand-pull inflation (Up to 6 marks) (8 marks maximum) candidates to make reference to at least two causes. If, however, the candidate provides application to one country and explains that there is only one cause of inflation in that country then up to 6 marks are available. 4(b) For analysis of how monetary policies might be used to correct inflation with due reference to the advantages and disadvantages of this approach. (Up to 4 marks) For analysis of how at least one other policy might be used to correct inflation with due reference to the advantages and disadvantages of this approach. (Up to 4 marks) (AN: Up to 8 marks maximum) Up to 4 marks for an evaluation as to whether monetary policy is the best way to correct inflation with 1 mark reserved for a reasoned conclusion. (EV: Up to 4 marks maximum) 12 Candidates need to explain how governments might use monetary policy to cure inflation and the difficulties associated with this. They can then compare this policy with fiscal and or supply side methods.

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