RI 2023 H2 Y6 Preliminary Examination - Examiner's Report

ECONOMICS Higher 2 Syllabus 9570 Examiner’s Report Year 6 Preliminary Examination 2023 R a f f l e sI n s t i t u t i o n N u r t u r i n g t h e T h i n k e r , L e a d e r & P i o n e e r TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y6/9570/Prelims/2023 2 © RI 2023 [Turn Over ECONOMICS Y6 H2 Preliminary Examination 2023 Paper 9570/01 Paper 1 Question 1 The Cotton Market (a) (i) With reference to Figure 1, identify the year in which cotton prices rose the most. [1] Cotton prices rose the most in 2021. Mark Scheme: - Correct identification – 1m Examiners’ Comments: - Most students were able to answer this question correctly. (ii) Using a diagram, explain the reason for such a change in price. [3] - Prices rose most significantly in 2021. - From Extract 1, there were heavy rainfalls in India in 2021. This led to a fall in world supply, causing the supply curve to shift le ftwards from S0 to S1, as shown in Figure 1. A shortage results, and prices are bided up. - From Figure 2, India is the world’s second largest producer of cotton. The fall in supply will have a huge impact on the total world supply. In this regard, the huge shortage that ensues will causes prices to rise very significantly in 2021. - Alternative Approach: Demand for cotton is price-inelastic as it is an essential input for clothing and furniture. As shown in Figure 1, the price is likely to rise more than p roportionate from P0 to P1 compared to the fall in equilibrium quantity from Q0 to Q1. Mark Scheme: - use of case evidence to explain fall in supply - 1m Figure 1: World Market for Cotton

Y6/9570/Prelims/2023 3 © RI 2023 [Turn Over - justify using either PED or Figure 2- 1m - diagram to show shift in supply curve - 1m - No brief adjustment process - Max 2 m Examiners’ Comments: - Most students earned the full range of marks for this question. They could correctly identify the supply determinant and did a very detailed adjustment process to analyse the effect on equilibrium price and quantity. - However, there were still many answers that could not identify PED as the reason for a huge rise in price as hinted in part ai. Even more candidates did not identify Figure 2 as a good reference point for India’s impact on the world cotton supply. - In the explanation of PED, the term ‘habitual consumption’ has often been misused. In this context, the price-inelastic demand for cotton should be linked to its importance as an input. (b) Explain whether the use of subsidies can help the US develop comparative advantage in cotton production. [5] ▪ Comparative advantage in cotton production means the country can produce cotton at a lower opportunity cost i.e. less of another good is foregone. Comparative advantage is dynamic and can be changed with government policies or with changes in quantity or quality of resources. Thesis: ▪ As the US subsidises cotton production, its supply rises - causing prices to fall. But this ‘artificial’ reduction in price has nothing to do with improving comparative advantage. ▪ Comparative advantage may be developed if the firms were to use the excess profits arising from the subsidies or from the rise in quantity demanded for exports (due to fall in price) to invest in research and development. This may facilitate the development of new technology and lead to better production processes and even cultivation that uses l ess water and land. The subsequent fall in MC and AC for firms leads to a fall in production cost for the US and allow it to gain comparative advantage in cotton production. ▪ From another perspective, if the subsidies by the government are directed toward s firms’ r&d efforts, the effect on comparative advantage can be more effectively enhanced. Anti-thesis: [any 1 idea] ▪ Idea 1: US does not have a comparative advantage hence the need for US to subsidise in the first place – reason being that it may lack the amount of arable land and conducive climate as compared to India. Moreover, cotton production seems to be labour-intensive. ▪ In Extract 2, in India there are ‘5.8 million farmers, the majority of whom are small-scale farmers cultivating land less than 2 hectares in size’. In this regard, US may be unable to compete in cotton production, given that its wages are much higher due perhaps to a smaller pool of unskilled workers and farmers. ▪ Idea 2: With huge government subsidies, firms are less likely to have the incentive to find their own ways to be cost-effective. Over the years, they are likely to be X -inefficient - operating at a point above their LRAC curve. Moreover, they are less likely to have the incentive to engage in process innovation to reduce costs. As a result, the higher cost of production will not allow the US to develop comparative advantage. Synthesis/Judgement: ▪ All things being considered, subsidies are unlikely to help the US dev elop comparative advantage - even into the long run. From Extract 2, the US has been subsidising cotton

Y6/9570/Prelims/2023 4 © RI 2023 [Turn Over production way before 2007 and the size of the subsidies seems to have increased – accounting or half or more of a grower’s cotton revenue. ▪ A need for subsidies for such a long period of time simply shows that the US does not and will not have comparative advantage. Perhaps, the US may have other reasons for continuing cotton production - reducing reliance on other countries being the reason – since cotton is an essential input. Mark Scheme - Thesis- 2m - Anti-thesis - 2m - Synthesised Conclusion - 1m - No reference to case material - Max 3 Examiners’ Comments: - This question required a T-AT- synthesis approach because of the cue word ‘whether’. - There were many answers that only offered a one -directional approach. And the explanation of how a rise in supply leads to a fall in price was often superficial. Answers wrongly explained that this (artificial) price fall allows the country to develop comparative advantage. The latter needs to be developed through efforts such as r&d. Such flawed responses often went on to discuss how the lowered price can improve the US trade balance and growth, which were irrelevant to the issue per se. - And these answers also discussed retaliation as a counter -argument. It was again invalid as the retaliation worked on the US balance of trade but is not likely to be linked to a change in the quantity or quality of resources which causes a change in comparative advantage. (c) With reference to Extract 3: (i) Explain how the pandemic is ‘potentially more damaging’ for clothing boutique businesses than food businesses. [3]\ ▪ Extract 3 states that ‘the consumption of apparel is more income responsive than the consumption of food commodities. This means that apparel has a higher YED value. ▪ Reason for difference in YED value: While people need food for survival, they may not ne ed new apparel as much especially in times of trying economic circumstances. ▪ It is also implied in Extract 3 that the pandemic may have led to a fall in incomes, causing the demand for normal goods like apparel and food to fall. ▪ The fall in income is likely to cause the demand for apparel to fall more than the demand for food – given its higher YED value. The larger fall in demand will cause the total revenue for clothing boutiques to fall – as equilibrium price and quantity decrease more significantly. T his thus has a more damaging effect. Mark scheme: - 1 m for explaining and justifying YED value - 1 m for linking fall in income to fall in demand/AR - 1 m for examining effect on TR/profits Examiners’ comments: - Flawed responses applied PED instead of YED when the case material clea