2013 MJC H1 Econs P1 QP

8819/PRELIMS/JC2/MJC/2013 1 MERIDIAN JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATION 2013 HIGHER 1 ___________________________________________________________________ H1 Economics 8819/01 Case Study and Essay Questions 16 September 2013 3 Hours Additional Materials: Writing Paper ___________________________________________________________________ READ THESE INSTRUCTIONS FIRST Do not open this booklet until you are told to do so. Write your name, class and register number in the spaces at the top of the answer sheets. Write in dark blue or black pen. Do not use staples, paper clips, highlighters, glue or correction fluid. You are reminded of the need for good English and clear presentation in your answers. Section A: Case Study (2 Hours 10 Minutes) Answer all questions. Section B: Essay (50 Minutes) Answer one question. Begin each question on a fresh answer paper. At the end of the examination, fasten all your work securely to the cover sheet with the string provided. The number of marks is given in brackets [ ] at the end of each question or part of a question. [Turn Over] ___________________________________________________________________ This document consists of 10 printed pages and 3 cover pages.

8819/PRELIMS/JC2/MJC/2013 2 Section A Answer all the questions in this section. Question 1 The Next Food Crisis Table 1: Annual Food Price Index (100=2002-2004) Date Food Price Index Meat Price Index Dairy Price Index Cereals Price Index Oils Price Index Sugar Price Index 2004 103.7 104.9 113.1 99.1 103.5 93.8 2005 103.3 105.8 119.2 91.2 91.3 123.6 2006 108.2 101.2 109.3 103.9 96.0 179.0 2007 127.7 100.7 170.9 134.3 136.8 115.1 2008 147.6 113.2 162.2 175.6 167.8 134.2 2009 123.9 105.0 111.8 137.2 119.2 203.2 2010 139.4 114.6 150.8 137.4 146.1 227.3 2011 154.0 119.5 149.2 167.1 170.7 249.7 2012 141.6 117.0 126.1 161.3 150.6 204.3 Source: Food and Agriculture Organization Extract 1: Food Prices The United States Department of Agriculture (USDA) recent ly released a report that said global output in several key commodi ties would fall while demand across a number of sectors would rise. The simple and relatively uncontroversial concept of supply and demand would dictate that food pr ices would increase. Following this announcement, prices did indeed rise. Co rn is up 94 percent, soybeans 51 percent, and wheat 80 percent. Current prices are so high that they exceeded a previous record set in 2008, and the United Nations' Food and Agricultur al Organization’s (FAO) Food Price Index is at an all-time high. Specifically, there are a number of causes for this dramatic leap. The USDA cited supply side problems, such as floods of Au stralia, poor weather in South America, and extremely dry weather in Russia last y ear. In addition, they expect ethanol producers to use more corn for production of biofuels. In a bigger picture, rising global standards of living are leading to more demand for meat. This leads to raising more livestock, which consume a large amo unt of grain and adds to more stress on already tight supplies. There's at least a glimmer of good new s on the demand side: World population growth, which peaked at 2 percent per year around 1970, dropped below 1.2 percent per year in 2010. But because the world po pulation has nearly dou bled since 1970, we are still adding 80 million people each year. A recent United Nations report estimates that food prices could go up by 40 percent over the next decade. However, supply co uld be upped with inducements made to cultivate more land in a sustainable fashi on, such as in Africa. Better producing

8819/PRELIMS/JC2/MJC/2013 3 strains of crops can be developed, such as during India’s famous Green Revolution. Demand could be reduced if countries could also work to reduce the amount of food supplies turned into biofuels. Source: Global Policy, February 2011 Extract 2: Export bans should be illegal The environment minister, Caroline Spelma n, today risked incurring the wrath of many major food-growing countries by saying it should be illegal to halt food exports even at times of national crisis. In a clear reference to Russia and the Ukra ine, which temporarily halted exports of wheat and other grains in order to protec t supplies for their own people during an unprecedented heatwave last year, she sa id no country should be allowed to interfere with the global food commodity market. Source: The Guardian, January 2011 Figure 1: Oil Price ($/barrel) Source: OECD Figure 2: Ethanol Production (Million Gallons) Source: FarmFoundation.org 0 20 40 60 80 100 120 140 Jan‐2004 Jul‐2004 Jan‐2005 Jul‐2005 Jan‐2006 Jul‐2006 Jan‐2007 Jul‐2007 Jan‐2008 Jul‐2008 Jan‐2009 Jul‐2009 Jan‐2010 Jul‐2010 Jan‐2011 Jul‐2011 Jan‐2012 Jul‐2012 Jan‐2013

8819/PRELIMS/JC2/MJC/2013 4 Extract 3: Impact of EU biofuel policies in developing countries The 2008 decision by EU countries to obtain 10% of all transport fuels from biofuels by 2020 is proving disastrous for poor countries. Develo ping countries are expected to grow nearly two-thirds of the crops that are mostly used for biofuels. "To meet the EU 10% target, the total land area directly required to grow industrial biofuels in developing countries could reac h 17.5m hectares, over half the size of Italy. Additional land will also be required in developed nations, displacing food and animal feed crops onto land in new areas, often in developing countries," says the report. Biofuels are estimated by the IMF to have been responsible for 20-30% of the global food price spike in 2008 when 125m tonnes of cereals we re diverted into biofuel production. The amount of biofuels in Europe 's car fuels is expected to quadruple in the next decade. The report attributes the massive growth in biofuel production to generous subsidies. It estimates that the EU biofuel industr y has already received €4.4bn (£3.82bn) in incentives, subsidies and tax relief and that this could triple to over €13.7bn if the EU meets its 2020 target. Source: The Guardian, February 2010

8819/PRELIMS/JC2/MJC/2013 5 Questions (a) Describe the trend in food prices from 2006 to 2011. [2] (b) Explain how domestic consumer s and producers in Russia and Ukraine are impacted by the halti ng of food exports in those countries. [3] (c) (i) Describe the relationship betwe en oil price and ethanol production between 2004 and 2010. [1] (ii) Explain the relationship observed in (c)(i). [2] (d) (i) Using supply and demand diagrams, explain how the use of subsidies to biofuel producers will impact the allocation of resources between biofuel and food. [4] (ii) Explain one factor that determines the impact of biofuel subsidies on government expenditure. [2] (e) Assess whether demand or supply fa ctors are more important in explaining the changes in food prices. [8] (f) Discuss the policy options availabl e to the world’s governments to address the rising food prices. [8] [Total: 30 Marks]

8819/PRELIMS/JC2/MJC/2013 6 Question 2 Eurozone Crisis Extract 4: Austerity measures force EU into record recession Government austerity measures have pus hed the Eurozone into the longest recession in European Union (E U) history. Figures rele ased today showed the EU's economy shrank 0.2 % in the first quarter – the sixth quarter in a row of contraction – and there is little indication this will change anytime soon. In an effort to stem the financial cris is, European nations have raised taxes and cut spending in order to reduce government debt. With private-sector spending