Cambridge A Level Economics 9708 — 2023 May/June Paper 2 · Variant 2

1 Is Nigeria being held back by its dependence on oil and gas? Nigeria has about half of West Africa’s population with approximately 202 million people and one of the largest populations of young people in the world. With an abundance of natural resources, it is Africa’s biggest oil exporter, and has the largest natural gas reserves on the continent. Nigeria is highly vulnerable to the global economic disruption caused by the COVID‑19 pandemic, particularly due to the steep decline in oil prices. Nationally, 40% of Nigerians live in poverty, while another 25% are vulnerable and could fall into poverty due to the pandemic. Oil accounts for 80% of Nigeria’s export revenues, a dominant position that it has occupied since the 1970s. Many people believe that Nigeria needs to move further away from its dependence on oil and natural gas. Initial attempts at diversification have produced limited gains as the policies have been aimed mainly at the domestic market to create jobs and to improve living standards. There needs to be a focus on export‑orientated manufacturing that should boost economic growth as it has done in countries such as Malaysia and Indonesia. Based on the experience of these countries, more open trade and competition policies would help to diversify the economy, especially as the African Continental Free Trade Area (ACFTA) takes effect. Nigeria needs to create at least five million new jobs each year to employ its growing population of young people. Table 1.1 Nigeria: key economic indicators 2016 2017 2018 2019 2020 Economic growth rate 1.6 0.8 1.9 2.2 –1.8 (% change in real Gross Domestic Product (GDP) per year) Inflation rate 15.7 16.5 12.1 11.4 12.8 (% change in Consumer Price Index (CPI) per year) Current account balance 0.7 2.8 1.30 –3.8 –3.7 (% of GDP) Government budget balance –3.9 –5.4 – 4.5 – 4.3 –5.2 (% of GDP) Unemployment rate 7.0 8.4 8.5 8.5 9.0 (% of labour force) Source : Global economy.com Nigeria’s economy entered a recession in 2020 due to fall in crude oil prices caused by falling global demand and measures to fight the spread of COVID‑19. Inflation rose in 2020 due mainly to higher food prices, the removal of fuel subsidies and an increase in the price of electricity. The budget deficit also worsened in 2020 because the COVID‑19 pandemic caused higher government spending and lower tax revenues, adding to the national debt. Nigeria’s national debt is sustainable at 25% of GDP, but interest payments are high, accounting for about 50% of government spending. Nigeria’s government could improve its finances by reforming domestic tax collection. Non‑oil tax revenue is equivalent to just 4% of GDP. An increase in the rate of value‑added tax (VAT) from 5% to 7.5% in 2020 resulted in less revenue than forecast because of the recession. A wider tax base could help the budget, but this will require significant reform to reduce both tax evasion and a large informal economy. Sources: Adapted from: World Bank in Nigeria Nov 2020 and: IMF News, African Department, February 2020 and: African Development Bank Group: Nigeria Economic outlook, 2021 (a) Compare the government budget balance of Nigeria in 2016 with the government budget balance in 2020. [2] (b) Using a production possibility curve (PPC) diagram, demonstrate the impact of the rising level of unemployment on the Nigerian economy. [2] (c) Consider the extent to which the removal of fuel subsidies in Nigeria would lead to an increase in inflation. [4] (d) Assess whether using supply‑side policy is the best way to diversify the Nigerian economy away from its dependence on oil and natural gas exports. [6] (e) Assess whether adjusting the collection of direct tax or indirect tax is likely to be more effective in increasing the tax revenue collected by the Nigerian government. [6]

Mark scheme: Question Answer Marks Follow the point-based marking guidance at the top of this mark scheme. 1(a) Compare the government budget balance of Nigeria in 2016 with the 2 government budget balance in 2020 Between 2016 and 2020 the budget deficit (1) increased (1) Guidance:  Must refer to the fact that the budget is in deficit both years  Do not accept e.g. ‘became worse’ 1(b) Using a production possibility curve (PPC) diagram, demonstrate the 2 impact of the rising level of unemployment on the Nigerian economy  For a fully accurately labelled PPC diagram i.e., axes labelled as 2 products and curve touching both (1)  Showing a movement to the left within the curve or from the curve to a position within the curve (1) 1(c) Consider the extent to which the removal of fuel subsidies in Nigeria 4 would lead to an increase in inflation.  For an explanation of why the removal of subsidies is likely to lead to an increase in the price of fuel e.g., by increasing the cost of producing and / or supplying fuel or by shifting the supply curve to the left to its original position. (1)  For an explanation of why this is likely to lead to an increase in inflation / a rise in the price level e.g., fuel will have a high weighting in the measurement of inflation / PED is likely to be inelastic/ it is an important cost of production that affects the price of many other products / it may lead to cost-push inflation. (1)  For an explanation of why this may lead to continuing inflation e.g., as price rises, wage demands fuel further inflation / may lead to an increase in the price level for a much wider range of products. (1) For some evaluation of the overall impact e.g., the inflationary impact may be offset by the fact that: (1)  there is a reduction in other costs/prices OR  PED may in fact be elastic leading to a fall in demand and therefore prices rise but at a lower rate OR  It also may depend on the size of the original subsidy. Accept any other valid reason why the inflationary impact may be offset. 1(d) Assess whether using supply-side policy is the best way to diversify the 6 Nigerian economy away from its dependence on oil and natural gas exports. Up to 4 marks for the explanation/analysis: of any valid supply-side policy to diversify the economy which may include:  Training and education  Government support to business e.g., assistance in setting up  Improved infrastructure  Research and development  Deregulation. For an explanation of the strengths and weaknesses with no explicit or clear implicit reference to how the chosen policy(ies) may help diversify the Nigerian economy away from its dependence on oil and natural gas exports then (maximum 1 mark overall) For analysis that clearly explains the strengths of the chosen policy(ies) in helping to diversify the Nigerian economy away from its dependence on oil and natural gas exports. (Up to 2 marks) For analysis that clearly explains the weaknesses of the chosen policy(ies) in helping to diversify the Nigerian economy away from its dependence on oil and natural gas exports. (Up to 2 marks) Up to 2 marks for evaluation:  Which must (weigh up) assess the analysis of the relative strengths / advantages and weaknesses / disadvantages of the policy/ policies in diversifying the Nigerian economy away from an overdependence on oil and natural gas exports.  Supply-side policy may also be judged against an alternative policy e.g., protection of infant industries.  Reaches an overall and justified conclusion as to whether supply-side policy is the best way in the context of the Nigerian economy (reserve 1 mark) 1(e) Assess whether adjusting the collection of direct tax or indirect tax is 6 likely to be more effective in increasing the tax revenue collected by the Nigerian government. Up to 4 marks for the explanation/analysis:  For a simple assessment of the strengths and weaknesses of different methods of collecting direct and indirect tax with no explicit link to their effectiveness in increasing the tax revenue collected by the Nigerian government then (maximum of 1 mark overall)  One method of adjusting direct tax may be to introduce a more progressive income tax. Analysis should consider the advantages and disadvantages of this in raising more domestic tax revenue. (Up to 3 marks maximum; but 1 mark maximum if only advantages or disadvantages are analysed.)  One method of adjusting indirect tax may be to further increase the rate of VAT higher than the rate of 7.5% mentioned in extract 2. Analysis should consider the advantages and disadvantages of doing this in raising more domestic tax revenue. (Up to 3 marks maximum; but 1 mark maximum if only advantages or disadvantages are analysed.) A maximum of 3 marks if only one type of tax is analysed. Issues to consider for both the above may include:  Fairness and equality  The amount that may be raised  Costs of ensuring compliance etc. Up to 2 marks for evaluation:  Which must compare and weigh up the likely effectiveness of both types of tax in raising tax revenue with consideration of the problems faced by the Nigerian government in increasing the amount of tax revenue raised.  Reaches an overall conclusion as to which type of tax is likely to be the most effective. Section B

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2 (a) With the help of a diagram(s), explain what is meant by consumer surplus and producer surplus and consider whether a rise in the price of a product because of higher costs of production is likely to always reduce the consumer surplus. [8] (b) A government wishes to keep the price of an essential food, such as rice, affordable to help low‑income households. Assess whether a policy of fixing the maximum price for an essential food is likely to be more effective than a policy of making transfer payments to low‑income households. [12] OR

Mark scheme: 2(a) With the help of a diagram(s), explain what is meant by consumer 8 surplus and producer surplus and consider whether a rise in the price of a product because of higher costs of production is likely to always reduce the consumer surplus. Follow the point-based marking guidance at the top of this mark scheme and award: up to 3 marks for AO1 Knowledge and understanding up to 3 marks for AO2 Analysis up to 2 marks for AO3 Evaluation. AO1 Knowledge and Understanding (max 3 marks) For a clear understanding of consumer surplus i.e., the difference between the price a consumer is willing to pay for a product and its market price (1). For a clear understanding of producer surplus i.e., the difference between the price a producer is willing to accept and what is actually paid (1). Both clearly shown on an accurately labelled diagram (s) (1) AO2 Analysis (max 3 marks) An accurately labelled diagram(s) showing a shift to the left in the supply curve (1) which explains and shows the extent of the change in consumer surplus for a product with an elastic price elasticity of demand (1) compared to a product with an inelastic price elasticity of demand (1) AO3 Evaluation (max 2 marks) Following suitable analysis of PED, it can be concluded that the overall impact is that consumer surplus will always fall (1) with a conclusion that the extent of the fall is dependent on the value of the price elasticity of demand (1). AO1 Knowledge and understanding 3 AO2 Analysis 3 AO3 Evaluation 2 2(b) A government wishes to keep the price of an essential food, such as 12 rice, affordable to help low-income households. Assess whether a policy of fixing the maximum price for an essential food is likely to be more effective than a policy of making transfer payments to low-income households. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 8 marks. AO3 out of 4 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis (max 8 marks) The advantages and disadvantages of using a maximum pricing policy may include:  If the price is set below the equilibrium price and quantity, then it will make e.g., rice more affordable.  This will help low-income consumers and improve their living standards and improve their health BUT  It will create a shortage and informal markets may arise.  Governments may have to increase their spending to enforce the legislation.  Rich and poor households gain equally. Transfer payments may include:  Unemployment benefits  Pensions  Food vouchers etc. The advantages and disadvantages include:  They can be targeted at those most in need.  They can be targeted at the purchase of basic foodstuffs BUT  May be costly and have an opportunity cost.  The policies may not be used for their intended purposes (even vouchers may be sold in illegal markets) A one-sided response can only gain a maximum of Level 2. AO3 Evaluation (max 4 marks)  Consideration of the relative effectiveness of a maximum pricing policy compared with the use of transfer payments.  Consider the impact on low-income consumers of basic foodstuffs  In conclusion, which policy is most likely to be effective in helping low- income consumers. Accept all valid responses. A one-sided response cannot gain any marks for evaluation. 2(b) AO1 Knowledge and understanding and AO2 Analysis 8 AO3 Evaluation 4

More questions on Methods and effects of government intervention in markets

3 (a) With the help of a diagram(s), explain what is meant by equilibrium in a market and consider the extent to which the equilibrium price and equilibrium quantity are likely to change for a product following an increase in the wages for labour across the whole economy. [8] (b) Entrepreneurs are vital in an economy to achieve long run economic growth. Assess whether encouraging entrepreneurship or increasing another of the factors of production will be a more effective way to achieve long‑run economic growth. [12] Section C Answer one question. EITHER

Mark scheme: 3(a) With the help of a diagram(s), explain what is meant by equilibrium in a 8 market, and consider the extent to which the equilibrium price and equilibrium quantity are likely to change for a product following an increase in the wages for labour across the whole economy. Follow the point-based marking guidance at the top of this mark scheme and award: up to 3 marks for AO1 Knowledge and understanding up to 3 marks for AO2 Analysis up to 2 marks for AO3 Evaluation. AO1 Knowledge and Understanding (max 3 marks) The equilibrium point is where the quantity demanded equals the quantity supplied (1) and there is no tendency to change in a market (1) with an accurately labelled diagram showing the equilibrium price and equilibrium quantity (1) AO2 Analysis (max 3 marks) Note: there are two possible approaches to answering this question. If both the approach focused on demand-side (inferior and normal goods) and the supply-side approach are attempted, then only the best response should be marked including marks for evaluation. EITHER: The demand curve will be expected to shift in this situation. Whether it shifts to the left or to the right will depend on the nature of the product and will shift to the left if it is an inferior good or to the right if it is a normal good. This should be the basis of the discussion. For an accurately labelled diagram demonstrating at least one of the appropriate shift(s) in the demand curve i.e., to the right and / or the left (1) that clearly shows the change in the equilibrium price and the equilibrium quantity for both a normal and inferior good (1) and is accompanied by a clear explanation of both shifts (1) If only one shift (normal or inferior goods) is explained, then a maximum of 2 marks. Note: it is acceptable to use the same diagram for both knowledge and understanding and analysis OR: The supply curve will be expected to shift to the left in this situation. For a fully accurately labelled diagram that is clearly micro based and focused on the impact on a single product (1) that is used to clearly explain the resulting change in the price depending on whether demand is price elastic or price inelastic) (1) and quantity supplied (depending on whether supply is price elastic or price inelastic/use of buffer stocks/ effect of improved productivity) (1) 3(a) AO3 Evaluation (max 2 marks) EITHER: The extent of the change will be determined by whether the good is a normal good or an inferior good / the value of ped / the value of YED / the value of PES / the size of the actual change in income. A discussion focused on the extent of change (1) followed by a justified conclusion (1) OR: The extent of the change will depend on the importance of wage costs to an individual firm / the significance of PES (1) A discussion focused on the extent of change followed by a justified conclusion (1) AO1 Knowledge and understanding 3 AO2 Analysis 3 AO3 Evaluation 2 3(b) Entrepreneurs are vital in a modern economy to achieve long run 12 economic growth. Assess whether encouraging entrepreneurship or increasing another of the factors of production will be a more effective way to achieve long run economic growth. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 8 marks. AO3 out of 4 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis (max 8 marks) The advantages of encouraging entrepreneurship include:  The fact that entrepreneurs are the ones who organise the other three factors of production to produce output in an economy.  They are the ones who take risks and in return receive profit which is the motivation to be successful and so stimulate economic growth.  The fact that entrepreneurs must be creative and innovative to succeed and therefore should have the skills to anticipate current and future needs to be successful and therefore increase the productive potential of an economy and thus stimulate long run economic growth e.g., as measured by a shift to the right of the PPC.  Modern economies are dynamic, ever changing and the need to respond quickly to changes is one that can be met by successful entrepreneurs. BUT  There may be a cost in training and educating future entrepreneurs.  The rate of success of a policy to increase entrepreneurship may be low  The success depends on other factors such as the availability of government subsidies etc. which have an opportunity cost as well as the availability and quality of the other factors of production,  Because of high risks, entrepreneurs may seek short run gain which may not encourage long run economic growth and may in fact make it less likely e.g., due to rapid depletion of scarce resources. These should be compared with the likely importance and the advantage(s) and disadvantage(s) of increasing one other factor of production i.e., land OR labour OR capital. This may include an assessment of the availability of other factors of production. A one-sided response can only gain a maximum of Level 2. 3(b) AO3 Evaluation (max 4 marks)  Consideration of the likely importance of increasing entrepreneurship compared to increasing one other factor of production to increase long run economic growth in a modern economy.  In conclusion, which factor of production is likely to be the most important. Accept all valid responses. A one-sided response cannot gain any marks for evaluation. AO1 Knowledge and understanding and AO2 Analysis 8 AO3 Evaluation 4 Section C

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4 (a) Two countries each produce two products and wish to trade with each other. Explain the difference between the principles of absolute advantage and comparative advantage and consider whether the principle of comparative advantage is always the more important influence when each country is deciding whether to trade with each other. [8] (b) Assess whether protectionism is the best way to correct a deficit in the current account of the balance of payments. [12] OR

Mark scheme: 4(a) Two countries each produce two products and wish to trade with each 8 other. Explain the difference between the principles of absolute advantage and comparative advantage and consider whether the principle of comparative advantage is always the more important influence when each country is deciding whether to trade with each other. Follow the point-based marking guidance at the top of this mark scheme and award: up to 3 marks for AO1 Knowledge and understanding up to 3 marks for AO2 Analysis up to 2 marks for AO3 Evaluation. AO1 Knowledge and Understanding (max 3 marks) Absolute advantage is a situation where, for a given set of resources, one country can produce more of a certain product than another country (1) comparative advantage exists where one country can produce a certain product at a lower opportunity cost than another country (1) plus a simple explanation that one country may have an absolute advantage in both products but the other country may have a lower opportunity cost in producing one of the products (1) AO2 Analysis (max 3 marks) The analysis should consider the advantages and disadvantages of using the principle of comparative advantage in deciding whether to trade or not. Maximum of 2 marks for an analysis that only considers the advantages and a maximum of 2 marks for an analysis that only considers the disadvantages. Points to consider include (N.B. this list is not exhaustive so allow any reasoned points):  The benefits of specialisation leading to a more efficient allocation of resources  An increase in world output  An increase in employment and living standards BUT  May exhaust finite natural resources due to over specialisation.  Strategic industry argument  Exchange rate may not lie between the opportunity cost ratios. Guidance: For AO1 and AO2, it is not expected that tables / numeric examples are used. However, they are acceptable provided they are appropriately explained. 4(a) AO3 Evaluation (max 2 marks) For an answer that clearly compares the advantages and disadvantages of the principle of comparative advantage (1) and uses the analysis to reach a reasoned conclusion as to whether it is always the most important factor to consider (1) AO1 Knowledge and understanding 3 AO2 Analysis 3 AO3 Evaluation 2 4(b) Assess whether protectionism is the best way to correct a deficit in the 12 current account of the balance of payments. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 8 marks. AO3 out of 4 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis (max 8 marks) Protectionism can include the use of:  Tariffs  Embargoes  Export subsidies etc. Analysis should consider the advantages and disadvantages of such a policy e.g.  Possible retaliation  Possible long-term reliance on such measures that may reduce future competitiveness etc. Analysis should also compare this policy with the advantages and disadvantages of another policy e.g., supply side policy, fiscal or monetary policy which may include:  Training and education to improve productivity.  Investment in better infrastructure  Incentives to entrepreneurs etc.  Expenditure dampening.  Encouragement of a depreciation in the exchange rate. A one-sided response can only gain a maximum of Level 2. AO3 Evaluation (max 4 marks)  Consideration of the relative effectiveness of the policies in correcting a deficit in the current account of the balance of payments.  A justified conclusion showing which policy is most likely to be successful in correcting a deficit in the current account of the balance of payments. Accept all valid responses. A one-sided response cannot gain any marks for evaluation. AO1 Knowledge and understanding and AO2 Analysis 8 AO3 Evaluation 4

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

5 (a) Explain the difference between cost‑push and demand‑pull inflation and consider which is more likely to occur if there is a depreciation in the exchange rate of a country with few natural resources. [8] (b) Assess whether monetary policy is the only way to control a high rate of inflation. [12]

Mark scheme: 5(a) Explain the difference between cost-push and demand-pull inflation and 8 consider which is more likely to occur if there is a depreciation in the exchange rate of a country with few natural resources. Follow the point-based marking guidance at the top of this mark scheme and award: up to 3 marks for AO1 Knowledge and understanding up to 3 marks for AO2 Analysis up to 2 marks for AO3 Evaluation. AO1 Knowledge and Understanding (max 3 marks) Cost push inflation is inflation caused by increases in the costs of production (1). Demand pull inflation is caused by increases in AD not matched by equivalent increases in AS (1). A clear explanation of the differences between the two (1) AO2 Analysis (max 3 marks) A depreciation in the exchange rate will lead to a fall in the price of exports for the trading partner and a rise in the price of imports for the country in question. This should be analysed with reference to the impact on the different types of inflation. Maximum of 2 marks if only demand-pull inflation is considered and should focus on the impact of the fall in price of exports and the rise in the price of imports and the possible impact on the X -M component of AD and therefore the impact on AD overall. Reference may be made to the PED of exports and the PED of imports. Maximum of 2 marks if only cost push inflation is considered. Reference must be made to the importance of imports (1) and the fact that this country has few natural resources which probably means they must be imported for the 2nd mark. AO3 Evaluation (max 2 marks) For an answer that clearly considers the fact that this country has few natural resources (1) to come to a justified conclusion as to which type of inflation is most likely to be the outcome for a country with few natural resources (1) AO1 Knowledge and understanding 3 AO2 Analysis 3 AO3 Evaluation 2 5(b) Assess whether monetary policy is the only way to control a high rate of 12 inflation. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 8 marks. AO3 out of 4 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis (max 8 marks) Explain the advantages and disadvantages of using monetary policy to control high rates of inflation to analyse its effectiveness. Points to consider may include:  The use of interest rates to dampen AD.  Reductions in money supply to dampen AD.  The use of credit regulations to influence bank lending BUT  There is also a time lag between implementing interest rate policy and it taking effect.  Other factors other than interest rates may affect consumer spending and offset the impact of a rise in interest rates e.g., consumer confidence, expectations etc. Monetary policy should be compared with the advantages and disadvantages of at least one other appropriate policy e.g., supply side and/or fiscal policy A one-sided response can only gain a maximum of Level 2. AO3 Evaluation (max 4 marks)  Consideration of the relative effectiveness monetary policy to control high rates of inflation compared with at least one other appropriate policy.  Although it is not necessary within the analysis / question, reference may be made to the relative effectiveness of these policies in controlling the different types of inflation.  A justified conclusion showing which policy is most likely to be effective in controlling high rates of inflation. A one-sided response cannot gain any marks for evaluation. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 8 AO3 Evaluation 4

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