NYJC_H1___H2_ECON_Q1_CASE_STUDY_ANSWER

1 Suggested Answers to Case Study Question 1 (a) (i) With reference to Figure 1, st ate the relationship between per capita income and food consumption as percentage of GDP. Inverse relationship (1) [1] (ii) Explain a possible reason for the above relationship. Countries with low per capita income will spend a very large percentage of their income on basic necessities; hence, food consumption as % of GDP will be high. or Countries with high per capita income spend a smaller % of income on basic necessities because once the basic needs of the people are satisfied they will spend a larger % of income on luxuries or they will save. So as income per capita increases the food consumption as % of GDP decreases. [2] (b) With reference to Extract 1 and using a diagram, explain the main causes of the sharp rise in food prices. Food prices are determined by market forces of dd & ss. The rise in price of food is due to an increase in demand by China & India which are experiencing economic growth. Rising income has led to higher purchasing power which has increased the demand for food.[Ext 1] (2) The sharp increase is due to the inelastic ss of food. (1) Diagram (1) [4] (c) With reference to the data a nd using your own relevant knowledge, assess the economic impact of sharp rises in food prices on the Asia 10 economies. The sharp rises in food prices will affect the Asia 10 economies differently depending on whether they are net food exporting or importing economies. Positive Impact Table 2: Countries with positive food trade balance, China, Thailand & India, will benefit from the sharp rise in food prices as they are the net food exporting economies. As demand for food is price inelastic, increase in the price of food will lead to a less than proportionate fall in Qd for food leading to an increase in food export revenue. This in turn may lead an improvement in balance of trade. The improvement in net exports will cause the AD to rise and bring about an increase in NY through the multiplier. - Countries with a big agricultural secto r will benefit from this sharp increase [8]

2 in food prices as this will increase the incomes of the farmers and will help to narrow the income gap between the rural and urban sectors. Negative Impact - Table 2: Countries with negative food trade balance, esp Korea, Hong Kong, Taiwan and Malaysia, will be adversely hit by the sharp rise in food prices as they are food importing economies. As dd for food is price inelastic, increase in the price of imported food will lead to an increase in food import expenditure. This in turn may lead to a worsening of the balance of trade. - The increase in import expenditure, c.p, may cause the AD to fall and slow down or reduce the growth rate of the economy, especially for countries with a large population size. - The rising import