JJC H1 Prelims P1 Qus

JURONG JUNIOR COLLEGE PRELIMINARY EXAMINATION 2008 ECONOMICS 8816/01 Higher 1 13 August 2008 Paper 1 3 hours Additional Material : Writing Paper / Cover Page READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters or glue. Section A Answer all questions Section B Answer one question. At the end of the test, place the cover page on top of your answer scripts and fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. JJ Economics This document consists of 8 printed pages. [Turn over

Section A Answer all questions in this section. Question 1 Extract 1: Behind food crisis, a fertiliser shortage Recently, with world economic growth at a brisk 5% a year, hundreds of millions of people began earning money to buy more meat from animals fattened with grains. That occurred at the same time that rising production of biofue ls, like corn-based ethanol, put new pressure on grain supplies. These factors translated into rising demand and higher prices for fertiliser. Prices at Florida, for one fertiliser, diammonium phosphate, jumped to $1,102 a ton from $393 a ton in the past year, according to JP Morgan Securities, which tracks the prices. Manufacturers are scrambling to increase the supply. At least 50 new plants to make nitrogen fertiliser are under construction, a nd phosphorous and potassium mines are being expanded. But these projects are expensive a nd time-consuming, and supplies are expected to remain tight for years. Fertiliser is virtually important in Iowa, w hose farmers grow more corn than any other state, and depend on fertiliser to greatly increas e their yields. In many countries, these cost increases have so far been offset by record hi gh prices for crops. But fertiliser inflation has created a crisis in countries that subsidise fertiliser use for farmers. In India, for instance, the government’s subsidy bill could be as hi gh as $22 billion in the coming year, compared with about $4 billion three years ago, and has prompted calls to change the program that India depends on to maintain its food supply. Once new supplies become available, the rising use of fertiliser will still pose difficulties. Environmental groups fear increa sed use, particularly of nitr ogen fertiliser made using fossil fuels. Because plants do not absorb all the nitrogen; much of it leaches into streams and undergrounds. Source: Adapted from Business Asia, 2 May 2008 Extract 2: Farmers doomed to pay price for export restrictions Surging prices for agricultural commodities – and the fear of shortages at home – have prompted some countries to impose restrictio ns on exports. But their moves threaten to prolong the current global food crisis – and even exacerbate it. Countries such as Argentine, India and Vi etnam have stopped their farmers selling crops abroad or tax exports heavily in an effort to keep local markets well-supplied and local prices for those crops low. This means that farmers in these countries are not benefiting from record international pric es. At the same time, these farmers are facing higher costs in the shape of higher prices for diesel, seed and fertilisers. [Turn over 2

In Argentine, the world’s third largest s oyabean exporter and the sixth largest wheat exporter, local wheat prices are about half the level of the international market. The result is that Argentine’s farmers could sow up to 15% less wheat this session because of the continued uncertainty about when the govern ment will permit exports. This reduction in acreage contrasts with the sharp increases in the EU and the US where local prices reflect the evolution of the international market. Source: Adapted from Financial Times, 18 April 2008 Extract 3: The food crisis is a chance to reform global agriculture Of the two crises disturbing the world economy – financial disarray and soaring food prices – the latter is the most disturbing. What action should be taken in response to this issue? Protection, subsidies and other such follies distort agriculture more than any other sector. A host of countries are imposing export taxes in stead, thereby fragmenting the world market still more, reducing incentives for increased output and penalising poor net-importing countries. The present crisis is a golde n opportunity to eliminate this plethora of damaging interventions. The focus should be shifting the farm sector towards the market, while cushioning the impact of high prices on the poor . Far greater resources need to be devoted to expanding long-run supply. Increased spending on research will be essentia l, especially into farming in dry-land conditions. The mo ve towards genetically modified food in developing countries is as inev itable as that of the high-income countries towards nuclear power. At least as important will be more effi cient use of water, via pricing and additional investment. People will oppose some of thes e policies. But mass starvation is not a tolerable option. Source: Adapted from Financial Times, 30 April 2008 Figure 1: Cost of fertiliser Figure 2: Percentage share of US corn Urea nitrogen ($ per tonne) production used to make ethanol 0 50 100 150 200 250 300 350 2002 2003 2004 2005 2006 2007 2008 0 5 10 15 20 25 30 1995 2000 2007 2008 2011 p Source: Financial Times, 30 April 2008 3

Questions (a) (i) With reference to Extract 1, briefly ex plain how the price mechanism works to allocate resources in the fertiliser market. [2] (ii) Explain one negative externality that resu lts from the consumption of fertiliser. [2] (iii) Discuss the benefits of subsidising the use of fertiliser in India. [6] (b) Using Figures 1 and 2, account for the soari ng food crop prices in recent years. [4] (c) Comment on the likely problems that may result from the policy of export restrictions adopted by the agricultural exporting countries. [8] (d) Discuss whether “shifting the farm sector towards the market” is the best option to relieve the world food crisis problem (Extract 3). [8] Total: 30 marks [Turn over 4

Question 2 The India Economy Extract 4: India’s Central Bank is ready for a fight The Reserve Bank of India (RBI), India’s centr al bank, surprised markets with a 25 basis point rise in its main lending rate on Friday and with a clear-cut declaration that fighting inflation now comes first. For a central bank that was seen as pro-growth for the past couple of years, this was a decisive change. This implies the central bank is now willing to make the trade-off and is ready to sacrifice growth to address price stability. The central bank increased its ma in lending rate by 25 points to 7.75 pe rcent and said it was jacking up the amount of funds banks must deposit with it for the third time in four months. The rate increase was the fifth in the fiscal year. The RBI also had this to say, “The stance of monetary polic y has progressively shifted fr om an equal emphasis on price stability along with