PJC H2 ECON P1

Pioneer Junior College 2011 9732/01/O/N/11 [Turn over Candidate Name: _____________________________ CT Group: ___________ Index number: __________ ECONOMICS 9732/01 Paper 1 Monday 19 September 2011 2 hours 15 minutes Additional materials: Writing Paper READ THESE INSTRUCTIONS FIRST Write your class, 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. Answer all questions. At the end of the examination, fasten your work for Question 1 and 2 separately. 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 PIONEER JUNIOR COLLEGE JC 2 Preliminary Examination 2011 Higher 2

Pioneer Junior College 2011 9732/01/O/N/11 2 Answer all questions Question 1 The Tea Boom: Steaming Ahead Extract 1: No Break for Britons as Tea Price Set to Soar Unilever, owner of PG Tips have announced price ri ses of up to 15 per cent on its loose tea and tea bags. Other big-name brands are expected to follow suit, with some analysts predicting rises of around £3 to £3.40 for a box of 160 tea bags. However the UK Tea Council, which represents both traders and producers, claims tea is currently underpriced and that a rise in prices is long overdue. Bill Goinan, executive chairman of the council, said the increase was reasonable and would ultimately benefit producers in some of the poorest regions of the world. He added: "For the last ten years tea prices have not risen one iota.” "In 1999 80 tea bags sold for £1.89 and in February of this year we had our first substantial price increase in ten years taking the price to £1.97." He said he did not believe increased prices would deter consumers from enjoying tea. "If you look at the price of tea it is extremely good value for money. It is two pence a bag for a wonderful, natural, healthy drink." Two years ago the international price of tea dropped to a 30-year low as demand was weak in the face of increased competition from coffee and other drinks. Manufacturer Unilever said rising costs were responsible for the increase in prices to the consumer. Source: Adapted from The Scotsman, 19 May 2009 Figure 1: Market Share in UK Tea Market Source: www.acnielsen.co.uk Extract 2: Tea Prices Brewing Up to Beat Record Tea prices are set to climb 10-15 per cent higher next year from current record highs because global inventories are depleted following crop failures by main exporters, the world’s largest tea leaf producer has forecast. The view of Mcleod Russel, the India-based planta tion company, is shared by others in the industry as production has been hit by simultaneous droughts in India, Sri Lanka and Kenya. Demand has remained strong in spite of the global economic downturn as retailers say consumers treat tea as an essential that they are not willing to cut back on.

Pioneer Junior College 2011 9732/01/O/N/11 [Turn over 3 The forecast comes after prices hit a record high at an auction in the Kenyan city of Mombasa, which sets the world’s benchmark. Best quality tea prices rose last week to $3.97 a kilogram, up 36 per cent from January and almost double the price in 2005. Naveed Ariff, general manager of Global Tea & Commodities in Mombasa, added that prices for top-quality teas could rise beyond the current reco rd of nearly $4 a kilogram owing to the poor weather. “It could even touch $4.50,” he said. Figure 2: Price of Tea ($ per kilogramme) Source: Adapted from Financial Times, 1 September 2009 Extract 3: Woes in the Tea Sector Rwanda produces one of the highest quality teas in the world. In 2009 tea became Rwanda’s main export by value, generating US$48.2 million (and US$55.7 million in 2010). At the same time, tea exports by volume nearly doubled, thanks to Rwanda tea’s high quality. High quality is also the reason for Rwanda tea regularly fetching premium pr ices. A significant share of medium to high quality teas is sold directly to retail stores in Europe. Rwanda’s tea production and marketing systems is dominated by state-owned companies. Tea is cultivated mainly on large plantations, which are owned and managed by about a dozen tea factories that process green tea into black tea. Approximately two-thirds of the tea produced in Rwanda is grown on industrial estates belonging to a state agency and a few private investors. The remaining one-third is grown by small-scale private growers. The tea sector faces difficulties in attracting investors that could bring in new technologies and provide access to established distribution chains. At the same time, there is a rapid increase in demand for high quality and niche tea. Given the rapidly growing global consumption of black tea, it is in Rwanda’s interest to further increase black tea production and to diversify into higher value niche tea, such as orthodox and green tea, aided by foreign investment. Labor productivity remains low compared to other tea producing economies, albeit it increased over the last decade. This is related to the fact that Rwanda has the highest proportion of rural population, most of them engaged in labor-intensive agriculture. It appears that most opportunities for future productivity gains lay in the area of making agricultural production less labor intensive. The agriculture sector suffers from insufficient access to finance and insufficient investment capital for farming, agro-processing and export development. Banks are reluctant to offer financial services to rural farmers due to the lack of information on profitability, low productivity and high vulnerability of the sector. The banking system also imposes heavy collateral requirements and poses inappropriate lending conditions, such as periodicity of repayment not linked to the agricultural cycle. In 2010, the agricultural sector received only 2.1 percent of total new authorized loans. Source: Adapted from The World Bank: Rwanda Economic Update April 2011

Pioneer Junior College 2011 9732/01/O/N/11 4 Table 1: Economic Indicators of Rwanda Economic Indicators/ Year 2006 2007 2008 2009 Inflation (Annual %) 8.9 9.1 15.4 10.4 Real GDP Growth (Annual %) 9.2 5.5 11.2 4.1 Literacy Rate (% of people ages 15 and above) - - - 71 Infant mortality rate (per 1000 live births) 82 78 74 70 Life expectancy at birth, total (years) 49 50 50 51 Source: The World Bank Data Questions (a) (i) Describe the trend observed in tea prices between 2005 and 2009. [2] (ii) Explain why crop failure in major exporting countries may cause tea prices to rise, showing how tea being an essential good would affect the extent of this rise in the short run. [4] (b) Explain the type of market structure operating in the UK Tea Market. [4] (c) (i) Describe the trend in the general price le vel of Rwanda over the period 2006 and 2009. [2] (ii) Discuss whether the data provided are sufficient to assess changes in the standard of living in Rwanda. [8] (d) As a consultant economist, what options would you present to the Rwanda government in promoting continuous growth in the agricultural sector? Justify your answer. [10] [Total: 30]

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