Cambridge A Level Economics 9708 — 2021 May/June Paper 2 · Variant 2

1 Rice farmers in Cambodia and Myanmar under pressure Rice farmers across Cambodia and Myanmar, in Southeast Asia, have been left searching for new markets for their crop after the European Union (EU) announced that it will now be imposing substantial tariffs on rice from both countries for the next three years. An investigation has confirmed that the increase in rice imports from these countries has been damaging to EU rice producers. Representatives of EU farmers welcomed the decision, as the cheap rice imported from Southeast Asia has been contributing to EU farmers and labourers leaving agriculture and migrating to towns. EU rice imports from the two Southeast Asian countries increased from 9000 tonnes in 2012 to 360 000 tonnes in 2017, leading to a sharp fall in the price of rice in the EU. In 2018, approximately 30% of all EU rice imports came from countries with duty-free status, with most being shipped in from Cambodia and Myanmar. The increase in low-price imports has caused serious difficulties for EU rice producers. Their market share in the EU dropped substantially from 61% to 29%. Rice is currently grown across eight EU countries including Italy, whose government initially requested that the EU investigate the issue in March 2018 to protect the EU rice industry. Cambodia and Myanmar have enjoyed duty-free rice exports to the EU since 2010, when tariffs on the crop were removed as part of a policy which aims to promote EU trade in goods with the world’s 50 least-developed countries. Other more developed countries in Southeast Asia, including Thailand and Vietnam, have long been paying tariffs of around US$200 per tonne for rice exports to the EU. For both Cambodia and Myanmar, rice is a major export and the EU has become their most profitable market, so the new tariff has harmed their economies. The EU is currently Cambodia’s largest destination for rice exports, accounting for 43% of all exported rice. It is thought that Cambodia’s rice industry could be put in a critical condition as a result of the EU tariffs. In order to offset the additional costs resulting from the tariffs, local rice farmers will have to cut production costs, and may need to grow different crops altogether. One suggestion is that government subsidies could make Cambodia’s rice industry more competitive. The impact of the tariff will ultimately depend on the extent to which EU consumers consider rice produced in the EU to be a good substitute for Cambodian rice. Consumers in Europe may not mind paying a bit more for Cambodian rice. Myanmar is in a similar situation, as the EU has become one of Myanmar’s major rice markets. Myanmar reached an all-time high of 293 000 tonnes of rice exported to the EU in 2017. But this could change now that there is a high barrier for entry to the EU rice market, forcing farmers to look closer to home for different buyers. Myanmar’s Rice Federation stated that the EU’s decision to levy tariffs on the country’s rice exports had serious potential negative effects on Myanmar’s economy. Source: Robin Spiess, Southeast Asia Globe, 18 January 2019 Table 1.1 Myanmar and Cambodia: consumer prices (annual percentage change) 2016 2017 2018 2019* 2020* Myanmar 6.8 4.0 7.1 6.8 7.5 Cambodia 3.0 2.9 2.5 2.5 2.5 *Projections Table 1.2 Myanmar and Cambodia: current account balances: (% of national income) 2016 2017 2018 2019* 2020* Myanmar –4.3 –4.7 –2.0 –4.0 –5.0 Cambodia –10.9 –10.5 –13.6 –12.7 –11.8 *Projections Source: Asian Development Bank: Asian Development Outlook 2019 (a) Compare the change in the price level in Myanmar with that in Cambodia between 2016 and 2018. [2] (b) Compare the current account balance of Myanmar with that of Cambodia in 2018. [2] (c) Explain any two policies that could improve the competitiveness of rice from Myanmar and Cambodia in the EU market. [4] (d) Discuss two factors that will determine the extent of the impact the EU tariffs will have on the economies of Myanmar and Cambodia. [6] (e) Discuss the view that the EU should give tariff-free access to the EU market to all producers of rice. [6]

Mark scheme: 1(a) Compare the change in the price level in Myanmar with that in Cambodia between 2016 and 2018. Both price levels rose/both countries had inflation (1 mark) The price level rose by more in Myanmar / less in Cambodia / the rate of increase was increasing in Myanmar and declining in Cambodia / prices were increasing at a faster rate in Myanmar than in Cambodia/the change in the price level was more volatile in Myanmar (1 mark) 2 Do not credit answers that merely trawl through the data with no meaningful comparison If the candidate suggests that prices fell in Cambodia, 0 marks 1(b) Compare the current account balance of Myanmar with that of Cambodia in 2018. Both are in deficit (1 mark) The deficit is a greater / more significant % of national income in Cambodia than in Myanmar (1 mark) 2 If the candidate states that the deficit is higher in Cambodia then this must not be credited. Do not allow a reference to the current account being negative/better/worse. For the second mark, the candidate must refer to % of national income as specified in the data i.e. Table 1.2 Question Answer Marks Guidance 1(c) Explain any two policies that could improve the competitiveness of rice from Myanmar and Cambodia in the EU market. For the identification of a valid policy (1 mark) and for explanation of how the policy could improve the competitiveness of rice (1 mark) e.g. government subsidies to rice producers (1 mark) should lead to lower prices for rice and therefore make rice more price competitive (1 mark) Government incentives for rice producers to carry out R and D (1 mark) may improve the quality of rice and its competitiveness (1 mark) Two policies required (2 × 2 marks) 4 A number of policies are acceptable. These include government subsidisation mentioned in the text: • export subsidies • devaluation of the currency to reduce export prices etc. Do not reward references to depreciation unless it is made clear that this is a ‘managed’ depreciation. Policies can also be designed to improve quality, productivity, etc. The policies must relate to government action and not action by individual firms (note – the gov action could be from either Myanmar/Cambodia OR from the EU.) Question Answer Marks Guidance 1(d) Discuss two factors that will determine the extent of the impact the EU tariffs will have on the economies of Myanmar and Cambodia. For each relevant factor identified (1 mark) explained (1 mark) and developed to show the impact on the economies of Myanmar and Cambodia (1 mark) e.g. The ped of rice (from Myanmar and Cambodia in the EU) (1 mark). If the demand is price inelastic this means that the rise in price will lead to a less than proportionate fall in QD (1 mark). Therefore, the exports of Myanmar and Cambodia may not significantly reduce (1 mark) Two factors required (2 × 3 marks) 6 General factors are required that apply to both countries. These include the price elasticity of demand for rice from these countries in the EU, the cross elasticity of demand between rice from Myanmar and Cambodia and rice from the EU, the extent to which they can find other markets, how the governments of these countries respond e.g. by providing subsidies/devaluing their currencies etc. The impact on the economy may be on balance of payments, employment, growth etc and needs to be clear. Reference to the fact that the tariffs will be substantial as quoted in the text, should be credited. 1(e) Discuss the view that the EU should give tariff-free access to the EU market for all producers of rice. For analysis of the reason(s) why free trade is justified (up to 2 marks) For analysis of the reason(s) why the market should be protected (up to 2 marks) For evaluation that considers both sides of the argument and which is clearly related to the EU market for rice (up to 2 marks) 6 This is effectively a question on free trade or protection. Good answers will need to recognise the context of the case study. For example, if they suggest that the European rice farmers are an example of an inefficient ‘sunset industry’ they need to question whether these should be protected. If the market discussed is clearly a market other than rice then do not reward.

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2 In 2018 the UK government, concerned about the rise in obesity, particularly amongst young people, imposed a tax on producers of sugar-sweetened drinks. (a) State what is meant by a demerit good, and with the help of a diagram(s) explain how a tax on producers can improve the allocation of resources in the market for sugar-sweetened drinks. [8] (b) Compare the likely effectiveness of a policy of imposing minimum prices on demerit goods with one other policy to improve public health and consider which policy is more likely to be successful. [12]

Mark scheme: 2(a) In 2018 the UK government, concerned about the rise in obesity, particularly amongst young people, imposed a tax on producers of sugar-sweetened drinks. State what is meant by a demerit good, and with the help of a diagram(s) explain how a tax on producers can improve the allocation of resources in the market for sugar-sweetened drinks. For knowledge and understanding of a demerit good which explains that the term refers to a good that has the cost of consumption underestimated/worse for the consumer than they realise/because of information failure (1 mark) and is overconsumed (1 mark) Application that uses a correctly labelled diagram to explain the impact of an indirect tax on price and quantity. Diagram showing a left shift in the S curve (1 mark) the fall in quantity consumed (1 mark) and the increase in price (1 mark) (up to 3 marks) An explanation that the tax is increasing the cost of production for producers (1 mark), which increases the price and reduces the consumption (1 mark) which removes the market failure/problem of information failure/improves the allocation of resources (1 mark) (up to 3 marks) knowledge and understanding that a demerit good is one that is worse for the consumer than they realise because of information failure. The diagram(s) should show that demerit goods are under-priced and over consumed and also how a tax can improve allocation. Question Answer Marks Guidance 2(b) Compare the likely effectiveness of a policy of imposing minimum prices on demerit goods with one other policy to improve public health and consider which policy is more likely to be successful. For analysis that explains the likely effectiveness of a minimum price on a demerit good. Maximum of 3 marks if only benefits or drawbacks are considered (up to 4 marks) For analysis that explains the likely effectiveness of one other policy. Maximum of 3 marks if only benefits or drawbacks are considered (up to 4 marks) And for evaluation that clearly compares the effectiveness of both policies (3 marks) that leads to a reasoned conclusion as to which policy is more likely to be successful (1 mark) 12 The effectiveness of a minimum price is dependent upon the ability to control prices and the likelihood that unauthorised / illegal / underground / informal / hidden markets might arise. Other policies include indirect taxes, education campaigns, subsidisation of alternatives. No credit for simply referring to part (a) 8 For knowledge and understanding, the

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3 (a) Explain how the concept of cross-elasticity of demand can be used to distinguish between goods that are substitutes, those that are complements and those that have no relationship. [8] (b) An economy is experiencing a fall in average incomes during a severe recession. Discuss the extent to which the concepts of income elasticity of demand and price elasticity of demand might be useful to an entrepreneur in this economy and consider which would be more useful. [12]

Mark scheme: 3(a) Explain how the concept of cross-elasticity of demand can be used to distinguish between goods that are substitutes, those that are complements and those that have no relationship. For knowledge and understanding of the concept of cross elasticity of demand. What it measures (1 mark) and the formula (1 mark) And application explaining that a positive value indicates a substitute (1 mark) and explains why (1 mark) And explains that a negative value indicates a complement (1 mark) and why (1 mark) And explains that a value of zero indicates unrelated goods (1 mark) and why (1 mark) candidate must display an awareness of the idea of ‘responsiveness’ as well as an accurate formula Question Answer Marks Guidance 3(b) An economy is experiencing a fall in average incomes during a severe recession. Discuss the extent to which the concepts of income elasticity of demand and price elasticity of demand might be useful to an entrepreneur in this economy and consider which would be more useful. For analysis that explains the usefulness of income elasticity of demand to an entrepreneur when incomes are falling. (Up to 4 marks) For analysis that explains the usefulness of price elasticity of demand to an entrepreneur when incomes are falling (Up to 4 marks) And for evaluation that clearly compares the usefulness of each concept (3 marks) that leads to a reasoned conclusion as to which is the most useful (1 mark) 12 Income elasticity of demand would be useful to an entrepreneur because it would indicate those goods that are likely to experience a decrease in demand and those that should experience a rise in demand i.e. normal goods and inferior goods respectively Price elasticity of demand will inform an entrepreneur of the possibility of changing prices to increase revenue. The estimates might be used by an entrepreneur or firms for sales forecasting, investment decisions, production planning, location and new markets. There are no KU marks awarded in part (b) for merely explaining/ defining terms or phrases within the question

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4 (a) Explain what is meant by deflation and use aggregate demand and aggregate supply diagrams to explain how it might arise in an economy. [8] (b) Discuss whether a government should use monetary policy or fiscal policy to solve the problem of deflation in an economy. [12]

Mark scheme: 4(a) Explain what is meant by deflation and use aggregate demand and aggregate supply diagrams to explain how it might arise in an economy. For knowledge and understanding of the meaning of deflation. Deflation is a sustained fall (1 mark) in the general price level (1 mark) One mark maximum for stating it is the opposite of inflation/negative inflation ( up to 2 marks max for KU) And application that uses an appropriate and accurate diagram to show how deflation might be caused by a fall in aggregate demand. For an explanation why AD may fall (1 mark) a diagram that shows the resulting change in general price level (1 mark) and explains how this causes deflation (1 mark) (up to 3 marks) And application that uses an appropriate and accurate diagram to show how deflation might be caused by a rise in aggregate supply. For an explanation as to why AS may increase (1 mark) a diagram that shows the resulting change in general price level (1 mark) and explains how this causes deflation (1 mark) (up to 3 marks) S/D, P/Q Reasons why AD may fall include: fall in either C, I, G, X or rise in M. Reasons why AS may rise include: increased investment, falling costs Question Answer Marks Guidance 4(b) Discuss whether you would advise a government to use monetary policy or fiscal policy to solve the problem of deflation in an economy. For analysis that explains how monetary policy can be used to stimulate aggregate demand with due reference to the strengths and weaknesses of this approach. Maximum 3 marks if only strengths or weaknesses are explained (up to 4 marks) For analysis that explains how fiscal policy can be used to stimulate aggregate demand with due reference to the strengths and weaknesses of this approach. Maximum 3 marks if only strengths or weaknesses are explained (up to 4 marks) And for evaluation that clearly compares the use of each policy to solve the problem of deflation (3 marks) that leads to a reasoned conclusion as to which policy may be the most appropriate (1 mark) 12 Monetary policy can include exchange rate policy and should be rewarded. The evaluation here should compare the strengths and weaknesses of each approach and arrive at a conclusion based upon this assessment. If a candidate gets MP and FP the wrong way around throughout their response then award a max of [1 + 1] marks for an understanding of both economic policy instruments. A response such as this should be recorded as [1 + 1 + 0] in the text box. There are no KU marks awarded in part (b) for merely explaining / defining terms or phrases within the question

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