Cambridge A Level Economics 9708 — 2019 Oct/Nov Paper 2 · Variant 3

1 China and India: BRICS partners yet competitors BRIC is a term referring to the economies of Brazil, Russia, India and China. It originated from Jim O’Neill of Goldman Sachs who predicted that these four countries would be the fastest growing market economies in the twenty-first century and that by 2050 they would be amongst the wealthiest economic powers. South Africa was added to the group in 2010 resulting in them being known as BRICS economies. It should be stressed that the five BRICS economies are not a formal trading organisation like the European Union, although their leaders do meet annually to discuss global economic issues of common concern and relevance. Of the five countries, China and India in particular compete with each other in world markets. India is following China in embarking on a policy of growth in its manufacturing industries; it is also a major exporter of agricultural goods to neighbouring countries in south-east Asia. Table 1.1 below shows that India has experienced the highest rate of consumer price inflation of all BRICS economies since 2008. It has also experienced a rapid deterioration of over 30% in its terms of trade. There are serious doubts over whether Indian products really can compete with those from China in world markets. Table 1.1: Consumer Prices Index (CPI) for BRICS economies, 2012–15 (2008=100) 2012 2013 2014 2015 Brazil 124.5 131.8 140.2 155.2 Russia 136.0 145.2 156.5 180.8 India 147.7 163.8 174.1 184.4 China 110.9 113.8 116.1 117.7 South Africa 123.9 131.0 130.0 145.4 Source: BRICS Joint Statistical Publications Fig. 1.2 below shows how China’s terms of trade have changed from 2012 to 2016. 120 115 Terms of 110 trade 105 index (2012 = 100) 100 95 90 2012 2013 2014 2015 2016 Fig. 1.2: China’s terms of trade index, 2012–16 Source: Trading Economics (a) (i) Using Table 1.1, compare the rate of inflation for China and India between 2012 and 2015. [2] (ii) Explain two possible reasons why the CPI might not be an accurate measure of inflation in a BRICS economy such as India. [4] (b) Explain one possible aggregate demand reason and one possible aggregate supply reason for the differing rates of inflation in the BRICS economies since 2012. [4] (c) (i) Using Fig. 1.2, describe how China’s terms of trade changed from the high point in 2015 to the end of 2016. [2] (ii) Explain one possible reason for this change. [2] (d) With the help of the information, discuss what is likely to be the most important factor that will determine how successfully India can compete with China when trading in world markets. [6]

Mark scheme: 1(a)(i) Using Table 1.1, compare the rate of inflation for China and India between 2012 and 2015. • very mild increase for China (6%); much greater for India (25%) • rate of increase more variable for India up to 2 marks for a developed point or accept two separate undeveloped points for 1 mark each 2 must manipulate the data to provide a comparison. If the data is simply repeated then no marks are scored. 1(a)(ii) Explain two possible reasons why the CPI might not be an accurate measure of inflation in a BRICS economy such as India. • identifies of a valid reason (1 mark) • explains of why this means that the CPI might not be an accurate measure of inflation (1 mark) 1+1 marks per reason and explanation, for 2 reasons 4 Each reason must be explained to gain both marks. Possible reasons include: • a large informal economy, not all transactions are monetarised • some transactions may be illegal/not recorded • problems of collecting meaningful data on expenditure patterns • there may be a large subsistence economy in India Question Answer Marks Guidance 1(b) Explain one possible aggregate demand reason and one possible aggregate supply reason for the differing rates of inflation in the BRICS economies since 2012. • identifies one factor that will change aggregate demand and cause a rise in the rate of inflation in a BRICS economy (1 mark) • explains why this will cause the rate of inflation to be different to other BRICS economies (1 mark) • identifies one factor that will change aggregate supply and cause a rise in the rate of inflation in a BRICS economy (1 mark) • explains why this will cause the rate of inflation to be different to other BRICS economies (1 mark) 4 All the economies in Table 1.1 experience continuous inflation over the period but the rates differ, with China’s rate being the lowest. Inflation can be caused for example by an increase in aggregate demand not matched by an increase in aggregate supply or a fall in aggregate supply greater than the fall in aggregate demand. Aggregate Supply reasons include the effects of a currency depreciation leading to rising import prices, a fall in supply of essential raw materials and above inflation wage increases. Aggregate Demand reasons include any causes of an increase in AD such as falling interest rates that stimulate consumption and investment expenditure, increases in government spending or a rise in net exports. For full marks the answer must be framed in the context of differing rates of inflation in the economies shown. 1(c)(i) Using Fig. 1.2, describe how China’s terms of trade changed from the high point in 2015 to the end of 2016. • for stating that the terms of trade have deteriorated / worsened / fallen (1 mark) • for valid use of the data in Fig. 1.2 to describe the change (1 mark) 2 China’s terms of trade have deteriorated as shown by a fall in the terms of trade index. Candidates may calculate the % fall in the terms of trade (21%) or they might state that it has fallen by approx. 24.5 index points. Simple reference to the data without interpretation fails to score the mark for description. Question Answer Marks Guidance 1(c)(ii) Explain one possible reason for this change. • a fall / deterioration in the terms of trade means a fall in export prices relative to import prices (1 mark) • explains one possible reason for the fall (1 mark) 2 Possible reasons include: • depreciation of currency • fall in demand for exports • increased price of imported raw materials 1(d) With the help of the information, discuss what is likely to be the most important factor that will determine how successfully India can compete with China when trading in world markets. • analysis that makes valid use of the data to explain the importance of the factor(s) (up to 4 marks) • comment and conclusion on why the factor chosen is the ‘most important’ (up to 2 marks) Maximum 2 marks if a valid factor is chosen that makes no use of the information provided 6 The answer needs to consider one or more factors that are likely to determine how successfully India can compete with China. These might include the relative rates of inflation, changes in the terms of trade of each economy or quality of product. A full answer needs to go on to make some evaluative judgement on why this should be considered the most important factor and arrive at a conclusion.

More questions on Price stability

2 (a) It has been reported that the world demand for chocolate is increasing at a time when the supply of cocoa beans, the raw ingredient required to produce chocolate, is not as large as expected. Explain, with the help of a diagram, the likely effects of these changes on the world market for chocolate products. [8] (b) Very high consumption of chocolate can lead to health problems such as obesity and diabetes, especially amongst young children in developed economies. Discuss what is likely to be the most effective policy to reduce these problems. [12]

Mark scheme: 2(a) It has been reported that the world demand for chocolate is increasing at a time when the supply of cocoa beans, the raw ingredient required to produce chocolate, is not as large as expected. Explain, with the help of a diagram, the likely effects of these changes on the world market for chocolate products. • accurate diagram showing demand and supply curves for chocolate (1 mark) • with equilibrium price and quantity (1 mark) (KU: up to 2 marks) • a separate diagram (or a development of the simple supply and demand diagram) showing that there will be a shift to the left of the supply curve for chocolate (1 mark); as a result of the fall in the supply of cocoa beans and a rise in price (1 mark) • a separate diagram (or a development of the simple supply and demand diagram) showing that there will be a shift to the right of the demand curve for chocolate (1 mark); as a result of the increased demand for chocolate and a rise in price (1 mark) • elaboration that considers the overall impact on the market price and quantity of the two changes together (up to 2 marks) (APP: up to 6 marks) 8 required showing a shift to the right of the demand for chocolate. This will show an increase in price and an increase in the quantity traded. For elaboration for example, the rise in price of the two changes will be determined by the extent of the shifts in demand and supply and factors such as the relative elasticities of supply and demand. Since the increase in demand and the decrease in supply have an opposite impact upon the equilibrium quantity, this is clearly indeterminate. Question Answer Marks Guidance 2(b) Very high consumption of chocolate can lead to health problems such as obesity and diabetes, especially amongst young children in developed economies. Discuss what is likely to be the most effective policy to reduce these problems. • explains one policy to reduce these problems with due reference to the strengths and weaknesses of this policy (up to 4 marks) • explains (at least) one further policy to reduce these problems with due reference to the strengths and weaknesses of the(se) policy(ies) (up to 4 marks) (AN: up to 8 marks) • evaluation that compares the policies to arrive at a conclusion on which is ‘most effective’ (up to 3 marks); and a conclusion of which is ‘most effective’ (1 mark) (EV: up to 4 marks) 12 One policy would be to increase the sales tax on chocolate and reduce the tax on healthier substitutes such as sugar free sweets. Another method would be to run an information campaign, say on social media, to warn of the consequences of excessive sugar consumption. The evaluation should make some judgement the relative effectiveness of such policies, given the addictive nature of chocolate.

More questions on Government policies to achieve efficient resource allocation and correct market failure

3 In March 2017, the Indian government announced a new five year programme of investment in the country’s nationalised railway system. (a) Explain, with the help of an aggregate demand and aggregate supply diagram, how this investment is likely to affect India’s output, prices and employment. [8] (b) Discuss whether a nationalised or a privatised railway system is likely to generate a better market for rail travel. [12]

Mark scheme: 3(a) In March 2017, the Indian government announced a new five year programme of investment in the country’s nationalised railway system. Explain, with the help of an aggregate demand and aggregate supply diagram, how this investment is likely to affect India’s output, prices and employment. • a diagram with correctly labelled axes showing aggregate demand and aggregate supply (1 mark) • with equilibrium price level and national output (1 mark) (KU: up to 2 marks) • shows the effect of an increase in investment upon aggregate supply and the impact on output, prices and employment (up to 2 marks) • shows the effect of an increase in investment upon aggregate demand and the impact on output, prices and employment (up to 2 marks) • elaboration that shows the impact on output, prices and employment of the combined effects of the changes in aggregate demand and aggregate supply (up to 2 marks) (APP: up to 6 marks) 8 right of AD, assuming no change in AS. It should therefore be recognised that this is due to the increase in the ‘I’ component of AD. Investment in railways is likely to shift both AS as well and hence affect output, prices and employment. In turn, there should be an explanation of how this will increase employment in the railway construction industry and subsequent wider impact on job creation. Question Answer Marks Guidance 3(b) Discuss whether a nationalised or a privatised system is likely to generate a better market for rail travel. • analysis that considers the advantages and disadvantages of state provision of rail transport (up to 4 marks) • analysis that considers the advantages and disadvantages of private provision of rail transport (up to 4 marks) (AN: up to 8 marks) • evaluative judgement that makes clear which is likely to best at providing new investment funding (up to 3 marks) with a conclusion (1 mark) (EV: up to 4 marks) 12 This question requires an answer that looks at whether such investment is best provided by the government or the private sector within the context of enterprise and opportunity cost. The cases for nationalisation and privatisation should be analysed with particular focus on the provision of funds for new investment but also in the broader sense of public vs market provision. Possible causes that might be explained include:

More questions on Different market structures

4 (a) Explain the likely causes of a deficit on the current account of the balance of payments for an economy that relies heavily on agricultural products. [8] (b) The largest economy in the world, the United States (US), records a persistent deficit on its current account of the balance of payments. Discuss what is likely to be the most effective way to reduce this deficit. [12]

Mark scheme: 4(a) Explain the likely causes of a deficit on the current account of the balance of payments for an economy that relies heavily on agricultural products. • meaning of the current account of the BoP (1 mark) • meaning of a deficit (imports > exports) (1 mark) (KU: up to 2 marks) • explains one reason that might cause a deficit in the current account of the balance of payments (up to 2 marks) • explains (at least) one further reason that might cause a deficit in the current account of the balance of payments (up to 2 marks) • elaboration that relates the deficit to dependence on agricultural products (up to 2 marks) (APP: up to 6 marks) 8 • A higher rate of inflation in an economy than in other trading economies • Decline in competitiveness of an economy’s industry because of lack of innovation • A rise/fall in the exchange rate with due reference to elasticities • An increase in trade barriers Question Answer Marks Guidance 4(b) The largest economy in the world, the United States (US), records a persistent deficit on its current account of the balance of payments. Discuss what is likely to be the most effective way to reduce this deficit. • explains one policy to reduce the deficit with due reference to the strengths and weaknesses of this policy (up to 4 marks) • explains (at least) one further policy to reduce this deficit with due reference to the strengths and weaknesses of the(se) policy(ies) (up to 4 marks) (AN: up to 8 marks) • Evaluative judgement that compares the effectiveness of the policies (up to 3 marks); conclusion regarding which is ‘most effective’ (1 mark) (EV: up to 4 marks) 12 Policies could be a range of expenditure switching policies such as competitive depreciation of the currency, tariffs, quotas and so on Or expenditure reducing policies such as tax rises, cuts in government spending or deflationary monetary policy such as a rise in the rate of interest, or tighter control the money supply The candidate needs to refer to the strengths and weaknesses of the policies and these need to be compared to arrive at a conclusion on which is likely to be most effective.

More questions on Policies to correct imbalances in the current account of the balance of payments