RVHS H1 ECONS QP RV

This document consists of 8 printed pages. [Turn over 1 ECONOMICS 8819/01 Paper 1 16 September 2014 3 hours Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your index number and name on all 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, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Start each case study on a new sheet of paper. Section B Answer one question. Start this question on a new sheet of paper. At the end of the examination, fasten all your work securely together. Your answers for each case study in Section A and the essay in Section B are to be handed in separately. The number of marks is given in brackets [ ] at the end of each question or part question. RIVER VALLEY HIGH SCHOOL YEAR 6 Preliminary Examination in preparation for General Certificate of Education Advanced Level Higher 1

2 Section A (70%) Answer all questions in this section. Question 1 Issues on sugar and ethanol Extract 1: US sugar subsidies and the Caribbean’s sugar economies The US government heavily subsidizes its sugar sector, imposes quotas on sugar imports but yet expects developing countries to cut back on their own subsidies. Under the quota system, quantities of imports above the quota limit are subject to stiff duti es. Sugar imports that exceed set quotas are struck with “a prohibitively high duty of 16 cents per pound”. Some Caribbean countries e.g. Brazil, face the most restrictive penalties, keeping their sugar out of the US market and lead to sugar prices in the US remaining above the free market price. Many of these impoverished Caribbean countries have been producing sugar for centuries, as their tropical, naturally fertile land and perfect weather conditions make them innately suitable for growing sugar. In contrast, subsidies to US sugar farmers are transmitted via a complex system of loans and quotas. Loans are usually granted directly to sugar processors instead of farmers, so there is hardly any wealth transfer from top to bottom. This quarter, the US Depa rtment of Agriculture (USDA) plans to buy sugar from processors at an approximate cost of US$38 million in order to increase sugar prices. USDA then sells this sugar to ethanol -producing firms for a much lower price, resulting in huge losses for the government. In relative terms, producing an ounce of sugar in the US is much more expensive than producing the same ounce in the Caribbean. A report by the Commerce Department revealed that each preserved job in the US sugar industry represents three jobs lost in confectionery manufacturing due to the resulting hike in sugar costs. Source: Council on Hemispheric Affairs, 31 July 2013 Figure 1: Commodity Market Price for Sugar (cents/ pound) Source: New York Board of Trade World Raw Sugar Prices US Raw Sugar Prices

© RVHS 2014 8819/01 [Turn over 3 Extract 2: Mexican sugar producers deny imports threaten US industry US sugar processors have accused Mexico of “dumping” subsidized sugar across the border in a complaint with the US International Trade Commission which could lead to duties on Mexican imports and spark retaliation against US exports. The tightly controlled US sugar industry has strict caps on imports – except for those from Mexico, which has unlimited, duty -free access under the North American Free Trade Agreement (NAFTA). US sugar processors who allege du mping margins of 45%, said a doubling in Mexican imports in the last year had pushed prices to a decade low and would cost them nearly $1 billion in net income in 2013-14. Despite calls for the US government to limit excessive sugar imports from Mexico a nd bolster prices, many manufacturers in US feel that restrictions on Mexican imports will nonetheless, harm their companies and many others who depend on a consistent, reliable supply of sugar. Source: www.reuters.com, accessed 18 April 2014 Extract 3: Sugar prices not so sweet The price of raw sugar on the global market is fast declining toward s the cost of production in No.1 sugar-cane grower Brazil. And speculators are betting that it will fall even further. Benchmark sugar prices have been decreasing since July on expectations that Brazilian producers would reap their largest harvest ever. That supply should continue to hammer prices through the summer. Unlike oil or copper, where the well or mine can be sh ut down when prices slide below production costs, sugar -cane mills can’t just leave the cane in the fields, nor do they have the capacity to store the sugar they make until prices rise. Source: www.online.barons.com, accessed 27 July 2013 Extract 4: Brazil’s ethanol sector buffeted by man-made and natural forces This should be a golden era for Brazil’s farming frontier, where some of the world’s biggest corporations have invested billions to turn sugar cane into ethanol. But oil – the fuel that ethanol was supposed to be slowly replacing, got in the way. The discovery of cheap gas and oil from tight shale formations in the US swiftly reduced the need for ethanol in the US. Then, in a policy to help reduce t he rising cost of living in Brazil, the government began to provide generous subsidies for gasoline, enabling it to be sold at steeply discounted prices. This made gasoline cheaper than ethanol for motorists. On the other hand, the cost of cane and ethanol production depends on costs of pesticides, cost of labour, and these have gone up due to a general rise in prices in Brazil. Virtually all cars manufactured in Brazil are flex-fuel, which means they can run on ethanol or gasoline. In 2008, 50% of the fu el sold in Brazil was ethanol. Now, it’s just above 30%, a drop that is particularly painful to the ethanol industry because car sales are skyrocketing due to cheap credit. Source: The Washington Post, 7 January 2014

4 Questions (a) (i) Compare the US pri ce of sugar and the world price of sugar between 2010 and 2013. [2] (ii) Explain any difference that you have observed. [3] (b) Using a supply and demand diagram, explain why the sales volume of ethanol fell despite rocketing car sales in Brazil. [5] (c) What can you conclude from the evidence in Extract 3 about the price elasticity of supply of sugar in Brazil? [2] (d) (i) State the theory of comparative advantage. [2] (ii) Explain what the US and the Caribbean countries should be doing, based on the theory of comparative advantage. [3] (e) The extracts ref er to the use of fuel subsidies by governments. Comment on whether such government intervention should be removed. [5] (f) How far does the use of protectionist measures achieve the aim of helping US sugar farmers? [8] [Total: 30]

© RVHS 2014 8819/01 [Turn over 5 Question 2 The UK productivity Puzzle – Did productivity really fall? Figure 2: UK Employment and Output Growth, 2000-2012 Source: Office for National Statistics Extract 5: The job-rich depression Britain’s economy has had an odd five years.