SAJC H2 ECONS P1 Case Study Questions and Answers

1 ST. ANDREW’S JUNIOR COLLEGE PRELIMINARY EXAMINATIONS – 2018 (JC2) General Certificate of Education Advanced Level Higher 2 ECONOMICS Paper 1 Additional Materials: Answer Paper 9757/01 27 August 2018 2 hours 15 minutes READ THESE INSTRUCTIONS FIRST Write your name and class 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. Start Question 1 and 2 on a fresh sheet of paper. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 7 printed pages and 1 blank page. © SAJC 2018 [Turn Over]

2 Answer all questions Question 1: Steel Industry in India Table 1: World Steel Output and Consumption (million tonnes) 2014 2015 2016 2017 Output 1,669 1,620 1,627 1,689 Consumption 1,546 1,500 1,516 1,587 Source: World Steel Association Figure 1: World Steel Prices (USD/tonne) Figure 2: Key Steel Producers in India Source: Tradingeconomics.com

3 Extract 1 Steel industry gets protection India’s Steel Minister Narendra Singh Tomar said that additional steps will be taken to protect domestic steel industry, which is facing a bad patch, in wake of cheap Chinese imported steel. “China was trying to dump its cheap steel in India and as a result of it, the domestic steel industry was in distress. To protest domestic industry, we enhanced import duty and imposed safeguard duty. But these steps were not enough and we will be taking additional steps in this regard”, said Tomar. Steel ministry along with the Finance and Commerce ministries are engaged in a dialogue to work out the steps that need to be taken for protecting domestic steel industry in the near future, according to media reports. “China is offering steel at half price compared to domestic industry in India. The way China is working, it appears (that) an economic war was on,” he said. Giving relief to domestic steel producers against cheap in-bound shipments, the government on Friday imposed a minimum import price (MIP) on 173 steel products ranging between $341 and $752 per tonne. The minimum price will remain in place for six months only. The Minister further said state-run steel production centres are being expanded and modernised and four new steel plants were being set up in Jharkhand, Odisha, Chhattisgarh and Karnataka. Source: realtyplusmag.com, 01 Feb 2016, www.thehindubusinessline.com, 05 Feb 2016 Extract 2: 'Iron and steel industries are economy's backbone' NAGPUR: Iron ore and steel industry is one of the basic industries of the country and plays an important role in strengthening the economy. Delivering a talk on the 'Indian iron ore industry-an overview', CS Gundewar, controller general, Indian Bureau of Mines said that India was the fourth largest producer of steel in the world. Iron and steel was one of the largest industries supporting the country's economy. At present India produces 65 million tonnes steel, but as per the 'National Steel Policy', the country is expected to raise this production to 180 million tonnes by the year 2020. But this, he said, would be possible only by exploring new mines. Though India has large resources of iron ores with estimated capacity of 28.52 billion tonnes, magnetite reserves could not be exploited due to the presence of these ores in the 'eco-fragile' zones mainly in Western Ghats. Gundewar also stressed on the need for more scientific and environment conscious mining by using eco-friendly technologies. Source: Timesofindia.indiatimes.com, 15 May 2013

4 Extract 3: What is making Indian steel expensive? A World Steel Dynamics (WSD) report has ranked India ahead of most countries, except those from the Commonwealth of Independent States, in terms of the cost curve. Yet, the sector is reeling from cheap imports and high inventory levels. According to WSD data for January this year, production cost for hot-rolled coils in India was $349 a tonne, compared with $428 in China, $429 in South Korea, $448 in Japan and the global average of $418. Add to it the taxes, freight and the cost of capital, and the picture isn’t really rosy for domestic steel makers, companies claim. “Our internal freight rate is two-three times higher compared to China,” says Sushim Banerjee, director-general of the Institute for Steel Development and Growth. Logistics costs from Bellary to Delhi would be $60, while for the same distance in China, a producer would pay only $18, says Jayant Acharya, director (commercial and marketing), JSW Steel. Former Tata Steel former managing director, J J Irani, says, “Most modern steel plants are shore-based, as the cost of transporting ores in large carriers is much cheaper than hauling it in trains. Korean and Japanese plants are all shore-based. They also import ores rather than mine ores.” Adapted from www.business-standard.com, 24 Sep 2015 Questions (a) (i) Describe the trend of world steel prices from Jan 2016 to Dec 2017. [1] (ii) With reference to Table 1, explain a possible reason for the apparent contradiction between the data and the trend of world price of steel in (a)(i). [3] (b) (i) Using an example, explain what is meant by a price floor. [2] (ii) With the use of a diagram, explain how a minimum import price could achieve the Indian government’s intended objective. [4] (c) In view of the current market structure in the Indian steel industry, discuss the possible impact of the Indian government’s removal of the minimum import price after six months on consumers and producers of steel in India. [8] (d) (i) With the use of an example, explain what is meant by comparative advantage. [2] (ii) Assess the options that are available to the Indian government to secure India’s comparative advantage in steel production. [10] [Total: 30]

5 Suggested Answers (a) (i) Describe the trend of world steel prices from Jan 2016 to Dec 2017. [1] The trend is generally a rising one. [1] (ii) With reference to Table 1, explain a possible reason for the apparent contradiction between the data and the trend of world price of steel in (a) (i). [3] Table 1 seems to suggest that there had been a surplus in the market from 2016 to 2017 as every year, the production is greater than consumption.[1] Hence, the world market price of steel ought to be falling. [1] Possible reason for ‘anomaly’ [1] However, as output may not equate to supply (portion of steel may be produced but not offered for sale), Table 1 may not therefore show the supply, and hence, the surplus of steel from 2016 to 2017. It is possible to postulate that some steel producers may have tried to withhold some amount of produced steel from the market in order to induce an upward pressure on steel prices. (b) (i) Using an example, explain what is meant by price floor. [2] A price floor is the legally minimum market price of a good or service and is set above the market equilibrium price. [1] E.g. A minimum import price on imported steel imposed by Indian government means that imported steel must not be sold less than the legally permissible price set by the Indian government. [1] Or A minimum wage is a form of price floor. It is the lowest wage a worker may be paid. Workers must not be paid lower than this legally permissible wage, usually set by governments or trade-unions. [1] (ii) With the use of a diagram, explain how a minimum import price could achieve the Indian government’s in