2013 NYJC H1 Econs QP

8819/1 H1 Economics 1 PAPER 1 Monday 16 September 2013 14:00 – 17:00 TIME : 3 hours 00 mins INSTRUCTIONS TO CANDIDATES Do not open this paper until you are told to do so. Write your name, class and name of economics tutor in the space provided on the writing paper. Answer all questions in Section A and one question in Section B. The number of marks is given in the brackets at the end of each question. Write your answers on the writing papers provided. If you use more than one sheet of paper, fasten the sheets together. You are advised to spend several minutes per question reading through the data and questions before you begin writing your answers. There are _8_ printed pages including this cover page PRELIM EXAM 2013 Economics JC 2 H1 (8819) NYJC

8819/1 H1 Economics 2 Answer all questions in this section. Question 1 The Market for Rare Earth Metals Figure 1: Global rare earth metals price index Figure 2: Global Rare Earth Metals Supply and Demand 2005 - 2010 Source: The Economist, 2 Sep 2010 World Demand World Supply Metric Tons Source: Industrial Minerals Co. of Australia

8819/1 H1 Economics 3 Extract 1: China’s grip on the world’s rare earth market may be slipping For the past two years, the world has had a rare earth problem. Rare earth metals are crucial for a wide range of electronics, from solar panels, fluorescent bulbs to iPod headphones to hybrid vehicles. And China produces 95 percent of the world’s supply. So when China began sharply restricting exports in 2010 — allegedly to give its own industries an advantage — the global prices for rare earths skyrocketed. Bad news. Except now, it is looking like the rare earth crisis is receding. Despite their colorful name, rare earth metals aren’t actually all that rare. At one point or another during the twentieth century, Brazil, India, the United States and South Africa were all major producers. In the 1980s, China decided to ramp up production massively, driving out competitors and cornering the market. China managed to do this, in part, through preferential policies by the Chinese gov ernment and lax environmental standards. This quickly enabled China to become a dominant, low-cost producer of rare earths by the late 1990s. In 2010, China decided to restrict its export quota by 40 percent. That helped drive prices up and suddenly made it economical for other countries to start boosting their own production again. Out in Mountain Pass, California, for instance, Molycorp is now reopening and expanding its massive rare earth metals mine. Many countries are also doing the same. Meanwhile, Japan has rushed to reduce its dependence on rare earths over the past few years—especially since China has a habit of restricting exports every time the two nations get into a territorial spat. Panasonic has developed a technique to recycle neodymium from old electronic appliances. Honda is extracti ng rare earths from used car batteries. TDK Corp., which creates magnets for motors, now sprays dysprosium on its motors rather than mixing it in, in order to conserve. Source: The Washington Post, October 19, 2012 Extract 2: The Case Against Lynas in Malaysia If everything goes as planned, by September this year, the largest rare earth refinery in the world will start operating in Gebeng Industrial Zone, some 25 km away from Kuantan town, home to almost half a million people. This plant will cast a shadow over Kuantan town. Real estate price will plunge, residents who are able to relocate will flee and those who are not will be in constant fear of radiation exposure. The authorities have learnt nothing from the Asian Rare Earth (ARE) debacle in Bukit Merah, Perak. The ARE plant was operated by Mitsubishi Chemical and it extracted rare earth from old tin mine slag. Unfortunately the waste contains high level of thorium, which is a perpetually radioactive substance because its half life is 14.05 billion years! The residents there blamed the plant for birth defects and eight leukemia cases, 7 of whom have since died. As a result of strong public opposition, the ARE was finally closed in 1992 and is currently undergoing a massive RM303 million cleanup. Similarly, for the new rare earth refinery, the point of contention is the waste management. Lynas will import rare earth ores from Mount Weld in Australia to be processed in Gebeng. The finished products will be exported overseas while the radioactive waste dumped in Gebeng. From the press statements, one can surmise that the waste management is not even finalized yet. Environmentalists contends that the much larger volume causes thorium levels to build up over time, to which Lynas has yet to provide any reply. Lynas also conveniently skipped the

8819/1 H1 Economics 4 issue of radon gas, another potent carcinogen, which is discharged when the ores are cracked. Finally, Lynas refuses to disclose whether they will process uranium bearing ores in Gebeng from their newly acquired Malawian mine in Gebeng. Source: Malaysia Today, 05 May 2011 Extract 3: China’s Rare Earth Industry and Export Regime Over the past few years, the Chinese governm ent has implemented a number of policies to tighten its control over the production and export of rare earths, which are important to a number of high technology industries, including renewable energy and various defense systems. Moreover, many analysts contend that China’s re cent actions to consolidate its rare earth production and restrict exports are intended to promote the development of domestic downstream industries, especially those engaged in high technology and green technology industries, by ensuring their access to adequate and low-cost supplies of rare earths. It is further argued that China’s rare earth export policies are intended to induce foreign rare earth users to move their operations to China, and subsequently, to transfer technology to Chinese firms. This would aid to increase the productive capacity of China. China denies that its rare earth policies are political, discriminatory, or protectionist, but rather, are intended to address environmental concerns in China and to better manage and conserve limited resources. However, there could be adverse effect on the Chinese economy. Source: Adapted from Congressional Research Service www.crs.gov Questions (a) With reference to the data (i) Summarise the trends in global rare earth metals prices from 2007 to 2010 [2] (ii) Prices of rare earth metals have changed differently for the period 2008-2009, and 2009-2010. Using demand and supply analysis, account for this difference. [4] (iii) What can be inferred from extract 1 about the rare earth metals prices in 2011? [2] (b) Explain why China adopted preferential policies for its producers of rare earth metals. [2] (c) (i) With reference to the data, define and explain how negative externalities can arise in rare earth metals extraction. [4] (ii) As a consultant economist, what options would you present to the Malaysian government for responding to the alleged negative externalities of rare earth metals extraction, and what would you recommend? Justify your answer. [8] (d) China can only benefit from the implementation of export restrictions on rare earth metals. Discuss. [8] [Total: 30 marks]

8819/1 H1 Economics 5 Question 2 India and its macroeconomic problems Extract 4: Slowing down of the BRIC Brazil, Russia, India and China, was acronymed into the BRIC in 2001 by Jim O’Neill, an investment banker from Goldman Sachs. In 2007 China’s economy expanded by an eye- popping 14.2%. India managed 10.1% growth, Russia 8.5%, and Brazil 6.1%. The I