Cambridge A Level Economics 9708 — 2024 Oct/Nov Paper 4 · Variant 1

1 The economic impact of extracting natural resources Many low-income countries have high unemployment and large deposits of unused natural resources. In 2007, Ghana discovered a new offshore oil field and extraction started in 2010. The discovery and extraction of such natural resources can create new jobs, that increase incomes and consequently gross national income (GNI). The additional income will lead to an increase in spending on both domestic and imported goods and services, creating further employment in other sectors through the multiplier effect. However, the extraction of oil may ‘crowd out’ other sectors of the economy. Workers might move, for example from agriculture and manufacturing to the mining sector due to higher wages. Also, the prices of houses, land and locally produced goods may increase. This could increase the cost of living and discourage businesses from operating in the affected region. The export of oil from Ghana causes an inflow of United States dollars (US$), increasing the exchange rate of Ghana’s currency, the cedi. This appreciation reduces the competitiveness of Ghana’s agricultural and manufactured goods, leading to an increased demand for imports. This loss of competitiveness is referred to as the ‘Dutch disease’, reflecting the experience of the Netherlands following the exploitation of their natural gas reserves. Oil provides the Ghanaian government with revenue from the tax on each barrel of oil produced. This revenue can be used to provide transfer payments and goods and services such as roads, health facilities, and public water supply. These can benefit both households and businesses. Alternatively, the presence of such revenues can create corruption and conflict as political groups compete for them. Between 2011 and 2018 agricultural products and food as a share of Ghana’s exports have decreased, as shown in Fig. 1.1. 100 80 manufactures exports fuel exports 60 ores and metal exports % agricultural raw materials 40 and food exports 20 0 2007 2008 2009 2010 2011 2012 2013 2016 2017 2018 Source: World Bank database, 2019 Fig. 1.1: Structure of exports of goods from Ghana 2007 to 2018 The extraction of natural resources has also affected Ghana’s economic performance, as shown in Table 1.1. Table 1.1: Selected economic data for Ghana, 2007 and 2019 2007 2019 Human Development Index (HDI) 0.55 0.61 GNI per capita (US$) ppp 2478 5484 exchange rate (cedi per US$) 1.06 0.17 (a) With the aid of a diagram, explain the effect of natural resource development on the potential growth of Ghana. [4] (b) Explain how the extraction of natural resources in Ghana will ‘create further employment in other sectors through the multiplier effect’. [4] (c) Explain what the information means by the ‘Dutch disease’ and using Fig. 1.1, consider to what extent Ghana suffered from this problem. [4] (d) Use the information to assess the impact of the extraction of oil on the standard of living in Ghana. [8]

Mark scheme: Question Answer Marks 1(a) With the aid of a diagram, explain the effect of natural resource 4 development on the potential growth of Ghana. Natural resource development will increase the potential growth of Ghana. (1) The production possibility curve or LRAS curve will move outwards. (1) Axes/labels (1) Shift in PPC or shift in LRAS (1) 1(b) Explain how the extraction of natural resources in Ghana will ‘create 4 further employment in other sectors through the multiplier effect’. The multiplier is the total increase in national income/output (1) from an increase in injections into the circular flow of income (1) The article identifies new jobs and their associated incomes (1) This in turn creates a further round of spending/jobs/income (1) 2 marks for understanding of the multiplier 2 marks for application using case study 1(c) Explain what the information means by the ‘Dutch disease’ and using 4 Fig. 1.1, consider to what extent Ghana suffered from this problem. When natural gas was discovered and exported from the Netherlands this caused the exchange rate to rise (1), and made manufactured exports more expensive (1) which led to a fall in manufacturing output/exports. (1) Manufactured exports fell from about 25% to less than 10%. (1) Chart 2 would support the claim. (1) 1(d) Use the information to assess the impact of the extraction of oil on the 8 standard of living in Ghana. Definition of the SoL: material and non-material well-being. (1) A wide range of data to choose from: • increase in jobs in oil and related industries (1) and increased income (1) • wider range of goods and services available (1) • job losses in other parts of the economy (1) • improvement in GNI more than double (1) • human development rating improved which cover education and health(1) But • no data on distribution of income (1) • working hours/leisure (1) • levels of pollution often significant in the oil industry (1) • chart 2 shows percentages so not possible to know if employment has increased or decreased in different sectors (1) Note: One-sided argument max 4 Conclusion A good deal of information suggests SoL has improved but data not definitive. (1) Note: max 4 marks for list Section B

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2 Governments in many countries are promoting policies that reduce the impact of the negative externalities. Evaluate, using appropriate diagram(s), the extent to which two policies used to reduce negative externalities can also improve allocative efficiency. [20] OR

Mark scheme: 2 Governments in many countries are promoting policies that reduce the 20 impact of the negative externalities. Evaluate, using appropriate diagram(s), the extent to which two policies used to reduce negative externalities can also improve allocative efficiency. 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 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • Definitions of negative externalities. • Explanation of negative externalities with example(s). • Analysis of the effects on output and price of negative externalities leading to over-production and under-pricing of goods and implication for allocative efficiency. • Identification, application and analysis of two policies which may reduce negative externalities. • Candidates may refer to: indirect taxation of activity, subsidies of alternative, prohibition of activities, improved information, pollution permits. Note: Maximum L2 if no diagram AO3 Evaluation • Evaluation may refer to direct cost of implementation, extent of impact on allocative efficiency, effect on production costs, local effects on employment, or regressive/progressive income effects. • Information failure preventing the extent of the negative externality being known. Accept all valid responses.

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Mark scheme: 3 Evaluate the consequences for the price and output of a firm if it 20 changes its objective from profit maximisation to sales maximisation as a response to the principal-agent problem. 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 14 marks. AO3 out of 6 marks. Indicative content AO1 Knowledge and understanding and AO2 Analysis • Definition/explanation of profit and sales maximisation (SM). • Explanation of the meaning of principal-agent problem. • Analysis of the profit maximisation in terms of MR = MC and the equilibrium price and output of the firm. • Analysis of the SM in terms of AR = AC and the equilibrium price and output of the firm. • Comparison of the price and output decisions of the alternative objectives. • Relevant diagrams may be used. AO3 Evaluation • Profit maximisation results in a higher price and lower quantity than SM. • Welfare benefits to consumer, as producer surplus is transferred to consumer. • Greater equality. • Misdirection of resources to SM firms therefore reduction in allocative efficiency. Accept all valid responses.

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4 In periods of rising and persistent inflation, consumers and workers change their expectations of the future rate of inflation. Evaluate, with the help of a diagram(s), the consequences of these changes of expectations for fiscal policy. [20] OR

Mark scheme: 4 In periods of rising and persistent inflation, consumers and workers 20 change their expectations of the future rate of inflation. Evaluate, with the help of a diagram(s), the consequences of these changes of expectations for fiscal policy. 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 14 marks. AO3 out of 6 marks. Indicative content AO1 Knowledge and understanding and AO2 Analysis • Definition of inflation, non-accelerating inflation rate of unemployment. • Expectations mean consumers and workers change their view on the future rate of inflation based upon their experience of past inflation rates. • Use of AD, AS analysis to show how inflation occurs. This may be referred to as cost push/demand pull inflation. • Explanation of Phillips curve in terms of the trade-off between wage growth/inflation and employment. This becomes a cost-push view of inflation as workers pursue higher wages to compensate for higher prices (the wage/cost spiral). • Analysis of Fiscal policy on changing unemployment/inflation. • Impact of changing expectations on the fall in unemployment and the rate of inflation Note: Maximum L2 if no diagram AO3 Evaluation • Changing expectations means that the anticipated fall in unemployment is temporary as consumers and workers negotiate higher wages to offset the past inflation. • Fiscal policy can no longer be used to reduce unemployment. • The shape of the AS curve – whether it is horizontal or vertical in the short-run. Keynesians argue AS is more elastic in the SR • Expansionary fiscal and monetary should not be used as they only create higher inflation. 4 • Phillips curve relationship may no longer be valid. In the 1970s there was high inflation and high unemployment, in the 2000s there was low unemployment and low inflation. • In the 1960s/1970s there was more structural strength between wages and inflation as there was a larger proportion of unionised labour and the ability of workers to negotiate higher wages was stronger. • Since the 1950s when the Phillips curve relationship was determined, there has been a significant increase in world trade and development of MNC the supply of labour is no longer limited by national borders. • To achieve low inflation and low unemployment policies which stimulate economic growth and supply-side policies which reduce capacity restraints are needed. Accept all valid responses.

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