2013 MI H1 Econs QP

Class Adm No Candidate Name: This question paper consists of 8 printed pages. [Turn over 2013 Promotional Examination 2 Pre-university 2 H1 ECONOMICS 8819/ 01 Paper 1 17 September 2013 Additional Materials: Writing Paper 3 hours READ THESE INSTRUCTIONS FIRST Write your name, class and admission number in the spaces at the top of this page and on all pages of the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams or graphs. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. Begin answers on a fresh sheet of writing paper. At the end of the examination, hand in all answers scripts. You are reminded of the need for clear presentation in your answers. The number of marks is given in brackets [ ] at the end of each question or part question.

2 [Turn over Question 1 The Pharmaceutical Industry Extract 1: AIDS: Branded and Generic anti-HIV drugs Roche, the pharmaceutical giant, recently announced a price of $20,424 for a year's supply of its anti-HIV drug Fuzeon in U.S. This was almost three times the price of the most expensive AIDS drug. Roche claimed that Fuzeon is more expensive to produce than other anti-HIV drugs, claiming that it spent $600 milli on developing the drug. However, many HI V drugs that cost up to $15,000 a year in the U.S. can be made for less than $300 a year by generic manufacturers overseas. These generic firms are allowed to enter the market and sell copies of the original drug when the pharmaceutical patent expires. As generic drugs contain exactly the same active chemical substances, these are considered as strong substitutes to the original branded drugs. Figure 1 Sources: World Street Journal, 1 Dec 00 and ACT up press release 13 Mar 03 Extract 2: Regulation of branded drugs In the past year, critics have complained that prescription drugs are contributing to escalating health care costs in the developed countries. Some also assail drug manufacturers, contending that drug prices are too high. They propose price controls as a way to lower drug prices. Price controls have a consistent history: they don't work. Whether they apply to air fares, gasoline, telecommunications or medicines, they discourage innovation, create shortages and fail to keep prices in check. Further, they harm the poor by making whatever is controlled more difficult and more expensive to obtain.

3 [Turn over However, according to leading prescription drug price and sales database information company, IMS Health, drug costs are rising primarily because of rising costs of innovation that contributed to record sales of new products and a changing mi x of available products. Price increases have been relatively modest over the past 10 years. Sources: National Centre for Policy Analysis Policy Report No. 23 Oct 99 and Focus 16 Apr 04 Figure 2: Composition of Drug Costs Sources: National Centre for Policy Analysis Policy Report No. 23 Oct 99 and Focus 16 Apr 04 Extract 3: Under-consumption of drugs in developing countries The major communicable diseases of poverty, especi ally AIDS, TB and malaria, cause over six million deaths annually, with devastating social and economic impacts. The global community has recognised the causal li nks between ill-health, poverty and weak economic growth. Historically, efforts to tackle the major diseases affecting developing countries have been poorly coordinated, resulting in under-consumption of drugs that can cure these diseases. OECD governments and international bodies such as the World Bank have stepped up investments in these areas. In response, new pr ivate sector allies– especially the pharmaceutical companies are forging partnerships with governments to undertake a wide range of activities, such as distributing dona ted or subsidised products , strengthening health service delivery and access to drugs and educating the public. Adapted from http://www.eldis.org

4 [Turn over Questions (a) (i) Describe the changes in sales of Glaxo’s AIDS drugs from 1997 to 2000 using Figure 1. [2] (ii) Illustrate, using demand and supply diagrams, how the change in the number of AIDS patients and entry of generic AIDS drug producers affect the market for branded AIDS drugs. [4] (b) (i) Using an appropriate diagram, explain the type of price control that can be used to regulate the price of branded drugs. [4] (ii) Discuss the effectiveness of price controls in the regulation of branded drugs prices. [6] (c) (i) Using relevant economic analysis, explain why the market fails to allocate sufficient resources to the consumption of drugs in developing countries. [4] (ii) Evaluate, with reference to Extract 3, the policies that governments in developing countries have undertaken to address the under-consumption of drugs. [10] [Total 30m]

5 [Turn over Question 2 The Chinese Economy Extract 4: China and Currency Manipulation The subject of whether China undervalues its currency to gain a trade advantage on the United States is a longstanding point of contention between Washington and Beijing. Critics in the U.S. claim that currency manipulati on has cost about 2 million U.S. jobs and hurt manufacturers. China claims that its exchange rates are not the reason for the trade gap and has accused the U.S. of using Beijing as a "scapegoat" for its greater economic woes. A wide coalition of US trade unions and members of Congress is stepping up pressure on President Barack Obama to confront China over alleged illegal currency manipulation. Source: Adapted from The Guardian, 20 May 2009 and http://worldnews.about.com Extract 5: China’s Exchange Rate Reform China’s fixed exchange system was discontinued from 2005 and a managed float system was adopted. A move that would increase the value of the Chinese Yuan against the dollar and help ease a trade imbalance, which has cost U.S. jobs. The move would come amid growing complaints that China’s undervalued Yuan has made it difficult for manufacturers in the United States and other countries to compete with China’s exports. However, He Weiwen in the Global Times news article states that the US trade woes shouldn’t be blamed on the Yuan. He points out that from 1998-2004, the Yuan was fixed at 8.28 to the dollar and China's exports to the U.S. varied from year to year stressing that the Yuan exchange rate doesn't play a significant role in affecting US exports. China also continued to record trade surpluses against the United States after it initiated exchange rate reform in 2005 to allow the renminbi to appreciate 20 percent against the US dollar. Source: Adapted from http://www.epi.org/news/china and EPI News, April 9, 2010, "China Reportedly Close to an Agreement to Revalue Yuan" Table 1: Growth of U.S. trade in goods with China (%) Before Chinese Yuan’s reform 1999 2000 2001 2002 2003 2004 Growth of China Exports to US (%) 14.9 22.3 22.3 22.4 21.8 29 Growth of US Exports to China (%) 7.9 23.4 18.5 15.4 28.2 21.4 After Chinese Yuan’s reform 2005 2006 2007 2008 2009 2010 Growth of China Exports to US (%) 23.8 18.2 11.7 5.1 -12.3 23.1 Growth of US Exports to China (%) 31.3 30.3 17.3 10.8 -0.3 32.3

6 [Turn over Extract 6: China’s Economic Growth to Benefit All of Asia? Foreign direct investment (FDI) into the mainland saw its strongest surge in more than two years last month with the US$14.4 billion of capital committed leavi ng the world's second biggest economy firmly on track to meet the government's target of US$120 billion of inflows this year. It is one of the principal drivers of mainland's breakneck econom