HCI H2 Econ Prelims P1

HWA CHONG INSTITUTION Preliminary Examinations 2008 General Certificate of Education Advanced Level Higher 2 ECONOMICS 9732/01 PAPER 1 Case Study 8 September 2008 2 hour 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name and CT 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. Answer all questions. Answer question 2 on a fresh sheet of paper. At the end of the test, submit your answers to question 1 and question 2 separately. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists 7 printed pages. HWA CHONG INSTITUTION [Turn over ©HCI Prelims 2008 9732/01/N/08

©HCI Prelims 2008 9732/01/N/08 2 Answer All questions. Question 1 Globalisation and Inflation Extract 1 Globalisation and Inflation 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 integration of more countries into the international trading system - production of goods and services that is intensive in the use of unskilled labour and labour-intensive elements within production cycles have shif ted to these emerging economies. This has increased the scope for businesses in the 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 prices of non-oil commodities substantially. Countries importing these commodities have therefore suffered an increase in the price of these imports. Globalisation has changed the inflationary process. Increased competition from these labour- abundant economies, freer movement of labour and increased trade and specialisation associated with globalisation reduces the response of inflation to the domestic output gap 1, and at the same time potentially more sensitive to the balance between world demand and supply. Variations in aggregate demand become less effective as a means of controlling inflation. The integration of China and the other emerging economies represents both an opportunity and a challenge for the industrialised economies. It is an opportunity because it allows a more efficient international division of labour and has the potential to raise living standards in both East and West. And it is a challenge because the global relocation of activities potentially involves losers as well as gainers. The danger is then that the realisation of those potential gains is prevented by the imposition of protectionist measures. Adapted from Speech by Charles Bean Executive Director and Chief Economist of the Bank of England, 24 October 2006 Figure 1: World inflation rate 1991 to 2008* 0 5 10 15 20 25 30 35 40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Per cent * Estimated for 2008 Source: International Monetary Fund database 1 Output gap refers to the difference between actual output and the potential output.

©HCI Prelims 2008 9732/01/N/08 3 Figure 2: Tariff rates of OECD* and non-OECD countries 1985 - 2003 *OECD consists of 30 full members. Of these, 27 are high-income countries as classified by the World Bank in 2007. Source: Organisation for Economic Co-operation and Development (OECD) database Figure 3: Imports of goods & services as % of world GDP Source: Organisation for Economic Co-operation and Development (OECD) database

©HCI Prelims 2008 9732/01/N/08 4 Questions (a) (i) With reference to Figure 2 and Fi gure 3, state the relationship between tariffs and imports. [1] (ii) Explain the law of comparative advantage. [2] (iii) Explain how the law of co mparative advantage can explain the relationship identified in (ai). [3] (b) (i) Define inflation. [1] (ii) Describe the trend of inflation for the period 1990 to 2008. [1] (iii) Explain the costs and benefits brought about by globalisation. [6] (c) (i) Examine how globalisation has changed the inflationary process. [6] (ii) “Globalisation brings about a change in the kind of policies a government needs to implement in or der to achieve the macroeconomic goals.” Discuss. [10]

©HCI Prelims 2008 9732/01/N/08 5 Question 2 Pharmaceutical Industry Extract 2 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 collectively 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 4: Global Pharmaceutical Sales Source: IMS Health, February 2007

©HCI Prelims 2008 9732/01/N/08 6 Figure 5: 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%