HCI H1EconPrelim Paper(with mark scheme)

ECONOMICS 8819/01 29 August 2008 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. Section B Answer one question. At the end of the test, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. HWA CHONG INSTITUTION College 2 Preliminary Paper 2008 General Certificate of Education Advanced Level Higher 1 This document consists 4 printed pages.

Extract 1: Global Pharmaceutical Industry The global pharmaceutical industry consists of thousands of companies, including biotech firms, generic drugmakers, contract research organisations, wholesalers and retailers. On top of them all sits “Big Pharma”— a dozen or so multinational firms with headquarters in Europe or America. Their sales account for roughly half of the world's $500 billion retail drug market. On the face of it, Big Pharma firms are in a business to die for. Populations in rich countries—and increasingly developing ones too—are getting older, and many people suffer from chronic conditions. But behind the healthy glow, a more worrying picture emerges. In the past few years large drug companies have had trouble getting new drugs out of their pipelines and into the market. At the same time, several high-profile medicines have been withdrawn because of safety concerns. The internal struggles of the world's leading drugmakers have been compounded by a broader social debate about the purpose and practices of the industry, again mostly in America. The US pharmaceutical industry is dominated by a few large firms that make up a significant share of the market. It has been argued that the drug industry derived a higher rate of return on its investment than other American industries. It has been argued that the pharmaceutical companies have at times exaggerated in their claims for the therapeutic value of certain drugs. It has been argued that the drug companies have spent an unreasonable portion of their budgets in order to indoctrinate doctors so that they would prescribe high-priced trade-marked products. Some critics of the drug industry argue that drugmaking should be taken out of private hands and put in the public domain; after all, many of the basic discoveries that drug companies develop and profit from came from universities and government institutes in the first place. But there is little evidence that governments or universities are any better than the private sector at bringing new drugs to market. The top US pharmaceutical companies have collective ly invested around 18% of sales on R&D over the past 7 years. The government may not like the way drug firms choose to spend their R&D dollars, or how they go about promoting their wares, but at least they have a record of bringing them to market in the first place. Adapted from: Prescription for Change, 16 Jun 2005, The Economist Figure 1: Global Pharmaceutical Sales Source: IMS Health, February 2007

Figure 2: Market share of US Pharmaceutical firms in 2006 Johnson and Johnson 18.98% Pfizer 17.21% Merck & Co. 8.06% Abbott Laboratories 8.00% Wyeth 7.24% Bristol-Myers Squibb 6.38% Eli Lilly and Co. 5.58% Amgen 5.08% Others 23.48% Source:http://en.wikipedia.org/wiki/List_of_pharmaceutical_companies Extract 2 – Chinese Pharmaceutical Industry In China, the biopharmaceutical industry has been recognized by the government as the most important and promising sector for the 21st century. With a healthy 20–25% annual growth rate and a diversified pipeline, the Chinese biopharmaceutical industry is moving toward globalization. The first Chinese biotech companies were mostly vaccine providers. These organizations have a relatively long history in China, and because of the domestic healthcare and vaccine needs of the world’s largest population they tend to be quite large. In China vaccines are classified into two categories: government "planned immunization" vaccines and "non-planned immunization" or "charged" vaccines. The first category of vaccines is ordered by the government, and supplied to Chinese citizens (mostly children) at no charge, in light of the benefits these vaccines possess. In the current Chinese market, domestic products completely control the planned immunization vaccine market. The second category is for-profit with high margins of 30–40% for imported vaccines and more than 50% for domestic vaccines. These are "charged for," or "non-planned" vaccines, produced by manufacturers based on the market demand. The charged vaccines may be purchased by consumers voluntarily. Chinese domestic vaccine manufacturers are now facing challenges as a growing number of imported products are entering the market. Domestic vaccines have dominated the Chinese market for decades, thanks to government protection (through restriction on foreign companies to set up vaccine manufacturing facilities)

and lower prices. Furthermore, the majority of these Chinese biotech firms do not invest enough in R&D and as a result do not possess innovative research personnel. Thus, the question posed in China today is how competitive are its domestic vaccine manufacturers compared with the multinational giants. "Which other country (than China) in the world would be able to satisfy the needs of vaccines for 1.3 billion people?" asked Dr. Weidong Yin, CEO of Sinovac Biotech. "Only we Chinese people can help ourselves. We will master core technologies and protect national security and public health...to prevent public crisis such as pandemic influenza, the key is to develop Chinese-owned vaccine products." Given the demographics, healthcare policy, and national needs, we believe there is a promising future for the Chinese vaccine industry. Adapted from: China Today: Vaccine Development in China, Eliza Yibing Zhou, BioPharm International Vol 20 Issue 4, April 1, 2007 Tasks: (a) (i) Summarize the trend of global pharmaceutical sales from 2000 – 2006. [2] (ii) From Extract 1, use demand and supply analysis to account for the trend. [5] (b) Explain the evidences from data which suggest that pharmaceutical companies in US enjoy market power. [3] (c) (i) Explain two possible sources of market failure that could account for the Chinese government’s provision of vaccination. [4] (ii) Evaluate the above policy that the Chinese government uses for planned immunization from the efficiency viewpoint. [8] (d) Given the different situations in US & China, assess if protectionism is the best policy for China’s pharmaceutical industry. [8] [30marks]

Question 2 Globalisation and Inflation Extract 3 The entry of China, India and Eastern Europe into the global market economy effectively doubled the economy’s labour supply driving down the wages of unskilled labour. The result of this progressive integr ation of more countries into the international trading system - pr oduction of goods and services that is intensive in the use of unskilled la bour and labour-intens ive elements within production cycles have shifted to t hese emerging economies. This has increased the scope for businesses in th e industrialised world to organise production in the most cost-efficient manner possible. However, the rapid Asian growth has also been a major driver of the tripling of oil prices since 2004, as well as pushing up the pric es of n