RVHS H1 ECONS QP

This document consists of 8 printed pages. [Turn over 1 ECONOMICS 8819/01 Paper 1 15 September 2015 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 II 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, corn and ethanol Extract 1: Sugar protectionism is immune to even modest reforms The well -known measures that protect sugar producers have received the Senate’s approval. Again, the Senate voted not on ending sugar protectionism but on making it slightly less irrational. One of the well -known practices is the imposition of a tariff on imported sugar. These protections are part of a “temporary” commodity support program created during the Great Depression, which transfers wealth from 316 million Am erican consumers to a few thousand sugar producers. What begins as simple garden -variety grasping becomes an entitlement, the argument being that the longer the benefit has lived, the more its beneficiaries have built their lives around it, so ending it would be disruptive. These sugar protectionist measures cause manufacturers of candy and products with significant sugar content to move to countries where they can pay the much -lower world price for sugar. The big companies like Mars and Hershey can locate plants around the world. The hundreds of family -owned American candy companies cannot. In the last four years, the U.S. sugar price has averaged between 64 percent to 92 percent higher than the world price. The costs are dispersed to hundreds of millions. The benefits accrue primarily to 4,700 sugar beet and sugar cane farms. Source: The Washington Post, 7 June 2013 Extract 2: U.S. corn syrup makers slash prices to fend off cheap sugar Corn syrup producers are scrambling to defend their once -dominant s hare of the U.S. sweetener market, offering rare price cuts for high -fructose corn syrup customers as tumbling sugar prices erode the advantage of typically cheaper syrup. A switch to sugar would further erode corn's role in the sweetener industry, which had already begun to shrink in recent years as studies linking high fructose corn syrup with obesity turned off consumers. Yoplait, General Mills Inc's yogurt giant, removed it from their products in 2013 because of customer demand. Corn syrup remains the most popular sweetener with a market share of 52 percent, having secured the market over the past three decades as high U.S. sugar prices prompted many major beverage companies to search for cheaper alternatives for use in soda. However, its competitive cost edge is now under threat. Although corn prices have tumbled this year ahead of a record 2013 harvest, U.S. sugar prices are suffering at multiyear lows as the North American market remains awash in supplies. In January, refined sugar prices fell to a discount against equivalent high -fructose corn syrup prices for the first time ever since 2000. "If a corn wet miller decided to raise prices or take a hard line in negotiations, there is a very real threat a buyer could convert back to sucrose," said a U.S. trader. Even so, switching sweeteners can prove tricky. Producers would have to use up their corn syrup stockpiles as well as change recipes, edit product labels and retrofit factories. Sugar prices would have to remain consistently low to trigger a sh ift in the use of the sweetener.

© RVHS 2015 8819/01 [Turn over 3 Then there is the matter of fickle consumer sentiment. When ConAgra Foods Inc swapped sugar for high fructose corn syrup in its Hunt's ketchup in 2010, customers complained about the taste. As a result, the company now offers both varieties. Source: Reuters, 11 November 2013 Extract 3: Brazil’s success in ethanol Brazil is an exception in a global economy fuelled by petroleum, having effectively weaned itself off of foreign oil imports by 2006, in part due to the develop ment of its ethanol industry. While much attention has been paid to Brazil’s energy model, no other country has yet been able to replicate it. “Brazil is unique,” said Terry McInturff, director of the Energy Commerce Programme at Texas Tech University. “E thanol is very much a niche there because of the geography and climate. It’s a huge country with ideal growing conditions for sugarcane,” the main crop from which most Brazilian ethanol is derived. Nonetheless, the ethanol industry has not been without i ts drawbacks. When global prices for sugar rise, sugarcane farmers prefer to sell their crops for processing as a sugar export rather than for ethanol, thereby forcing the government to increase subsidies to the industry to increase production level. Source: International Business Times, 8 February 2013 Figure 1: World Price of Sugar (cents per lb) Source: Trading Economics Jan 2011 Jan 2012 Jan 2013 Jan 2014 10 15 20 25 35 30

4 Figure 2: World Consumption and Production of Sugar (Million Metric Tons) Source: Foreign Agricultural Service, United States Department of Agriculture Questions (a) With reference to Figure 1 and 2, (i) Identify the trend in sugar prices from 2011 to 2013. [1] (ii) Explain the trend identified in part (i). [2] (b) Using a diagram, explain how import tariffs as mentioned in Extract 1 would help the U.S. sugar producers. [3] (c) With reference to Extract 2, explain whether corn syrup producers should be worried about their share of the sweetener market. [6] (d) Explain one possible factor that determines the impact of a sugar subsidy, like those given in Extract 3, on government expenditure. [2] (e) Discuss the extent to which Theory of Comparative Advantage explains why Brazil is the top exporter of sugar. [8] (f) Discuss the view expressed in Extract 1 that protectionist policies on sugar in the US are irrational. [8] [Total: 30] Source: Federal Reserve Figure 3: US-Dollar to Brazilian-Real Exchange Rate (per US$) 150 160 165 170 180 175 155

© RVHS 2015 8819/01 [Turn over 5 Question 2 The Canadian Economy in 2013 Figure 1: Canadian Dollar per USD (2013) Source: www.fx-exchange.com, accessed on 29 July 2015 Extract 1: Canada's slowdown spurs skepticism over economic 'miracle' Canada’s recovery from a mild 2008-09 recession was quick and job-filled. No bank needed a government bailout, the housing market did not collapse and Finance Minister Jim Flaherty repeatedly boasted about how Canada was outperforming its partners in the Group of Seven rich industrialized economies. But recent growth has consistently fallen short of expectations and a very rough patch late last year turned disappointment into dread. Previous engines of growth – housing and consumer spending – are slowing, and businesses are shy