SAJC 2025 Prelims P2 Essay Answer Key

This document consists of 3 printed pages and 1 blank page. © SAJC 2025 ST ANDREWS JUNIOR COLLEGE Economics Department [Turn Over 9570/02/Sep/25 ECONOMICS 9570/02 Paper 2 15 Sep 2025 2 hours 30 minutes No Additional Materials are required. READ THESE INSTRUCTIONS FIRST An answer booklet will be provided with this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. Answer three questions in total, of which one must be from Section A, one from Section B and one from either Section A or Section B. The number of marks is given in brackets [ ] at the end of each question or part question. St Andrew’s Junior College JC2 Preliminary Examinations for General Certificate of Education Advanced Level Higher 2

2 © SAJC 2025 9570/02/Sep/25 1 The US economy contracted by 0.3% in Q1 2025 . To revive the declining domestic textile manufacturing industry, the US has decided to impose tariffs (import taxes) on imported textiles. China remains competitive as she can manufacture both low-end as well as high- end textiles. Source: CNN (a) Explain how a production possibility curve (PPC) can be used to illustrate the concept of scarcity, choice and opportunity cost, and explain how the impact of US tariff s on Chinese imports can be shown on China’s PPC. [10] (b) Discuss the likely effects of a contraction of the US economy and the imposition of tariffs on consumer expenditure on different types of imported textiles into the United States. [15] Question Analysis (a) Command Explain Content PPC – scarcity, choice, opp cost Impact of tariff on PPC Context China Schematic Plan Requirement 1 Requirement 2 Explain how PPC can be used to illustrate the concepts of scarcity, choice and opportunity cost. Explain how US tariffs will lead to an inward movement in China’s PPC in SR and inward shift of PPC in LR. R1: Using PPC to show concept of scarcity, choice and opportunity cost The production possibility curve (PPC) shows all combinations of the maximum quantities of two goods that can be produced by an economy with a given amount of resources fully and efficiently employed at a given state of technology in a given time period. The diagram below assumes a simple economy only producing two goods: capital goods and consumer goods.

3 © SAJC 2025 9570/02/Sep/25 Scarcity arises because of limited resources but unlimited wants. This can be illustrated by the unattainable combinations outside the PPC boundary shown by point A. The country currently does not have the necessary resources or the level of technology needed to produce that combination of capital goods and consumer goods. An economy cannot produce at points beyond the production possibility curve. Choice is illustrated by the need to choose among the alternative attainable combinations along the curve (points B or C). If the economy wants more capital goods by choosing combination B instead of C, then it must be prepared to produce fewer consumer goods. Opportunity cost refers to the value of the next best alternative foregone when a choice is made. In the context of this PPC, assume that an economy can either choose to produce at point B or C. As explained earlier, a country can choose to either produce at point B or point C. Opportunity costs refer to the units of one good (e.g. capital goods) that need to be given up to produce one more unit of another good (e.g. consumer good). In order for the economy to produce more units of consumer goods, it needs to give up some units of capital goods, i.e. movement from Point B to C. In order to produce 160 more units of consumer goods, it has to give up 70 units of capital goods. There exists a trade-off because given that the limited amount of resources have been fully and efficiently employed, the economy would have to reallocate some resources e.g., labour and capital away from the production of capital goods towards the production of consumer goods instead.

4 © SAJC 2025 9570/02/Sep/25 R2: Impact of US tariff shown on China’s PPC Consider SR impact The immediate impact of US tariff on China’s imports is that there will be less Chinese imports in the US. Viewed from China’s perspective, this means that there will be lesser exports in China. Assuming ceteris paribus, the decrease in export revenue would lead to a decrease in AD and unplanned inventory accumulation at initial GPL. Firms will hire less factors of production, e.g. labour, and there will be a decrease in derived demand for labour leading to higher unemployment. This can be represented by a movement of the point on the PPC to a point within the PPC, i.e. Point A to B in the diagram below. Consider LR impact If the tariff persists in the longer term and assuming China is unable to redirect its trade to other countries, there might be closure of production facilities, e.g. factories, which might decrease the productive capacity of China’s economy. This can be illustrated with an inward shift of the PPC from PPC1 to PPC2.

5 © SAJC 2025 9570/02/Sep/25 Level Knowledge, Analysis, Understanding and Application Marks L3 Thorough knowledge of the theory with an excellent ability to describe & explain in a precise, logical and reasoned manner. This is done and supported with an appropriate tool of analysis. (PPC diagram) Able to explain the concept of scarcity, choice and opportunity cost clearer. Able to consider the SR or LR impacts of US tariff on China’s PPC clearly. 8 – 10 L2 Accurate although undeveloped exp lanation of the theory. Mistakes made mar the otherwise well-explained answers. 5 – 7 L1 Answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped. Basic errors of theory or an inadequate development of analysis may be evident. 1 – 4 Question Analysis (b) Command Discuss Content DDSS, PED, PES, YED, consumer expenditure. Context Types of imported textiles in US Schematic Plan Note to candidates: A deliberate decision was made to categorise the demand for low-end textiles as price inelastic, and the demand for high-end textiles to be price elastic so that the resultant change in CE will be easier to determine. See table below. High-end textiles Low-end textiles R1: Contraction of US economy Income falls → given that YED >1, DD ↓ CE decreases Income falls → given that YED <0, DD ↑ CE increases R2: Imposition of tariff SS decreases given that PED>1 CE decreases SS decreases given that PED<1 CE increases Overall CE decreases CE increases Requirement 1 Requirement 2 Effects of contraction of the US economy on consumer expenditure on imported textiles. 1. High-end textiles (luxury) 2. Low-end textiles (inferior) Effects of tariff on consumer expenditure on imported textiles. 1. High-end textiles (luxury) 2. Low-end textiles (inferior)

6 © SAJC 2025 9570/02/Sep/25 R1: Effects of contraction of the US economy on consumer expenditure on imported textiles Shift in DD: High-End Textiles, YED >1 The contraction of the US economy suggests that the real national income has fallen resulting in lower incomes for households. Using the concept of YED, the value of YED for high-end luxury textiles is likely to be greater than 1, i.e. YED>1