PJC H1 ECON P1

Candidate Name: __________________________ CT Group: _______ Index number: __________ ECONOMICS 8819/01 Higher 1 Paper 1 Monday 19 September 2011 3 hours 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. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten your answers for Questions 1, 2 and 3 or 4 separately. The number of marks is given in brackets [ ] at the end of each question or question part. This document consists of 10 printed pages and 2 blank pages. [Turn over PIONEER JUNIOR COLLEGE JC 2 Preliminary Examination 2011

PJC H1 Prelim 2011 2 Section A Answer all questions in this section. Question 1: A Sweet Deal Gone Sour Extract 1: Sugar Prices Head Towards the Sky The price of raw sugar has increased to its highest level since 1981, as supply concerns grow. Growing demand for sugar to be turned into ethanol, coupled with a sharp fall in production, have both prompted worries. Sugar production in India for 2008-09 fell 45% year-on-year and a "drastic fall" is expected for the coming Indian crop. India had less rain in the monsoon season and it was also uneven, damaging a number of agricultural crops. There are concerns that the pending sugar crop, which will be ready around November, will be inadequate. As the world’s largest consumer and second-largest producer, India’s output swings, which move the country back and forth from the status of an exporter to an importer, are a key factor in prices. Sources: The Financial Times, 28 July 2009 & BBC News, 10 August 2009 Extract 2: Food Companies Ask US Government to Boost Sugar-Import Quotas A coalition of food companies including General Mills Inc., Kraft Foods Inc. and ConAgra Foods Inc. asked the U.S. government to increase sugar-import quotas after inventories fell to a 34-year low and prices surged. The Sugar Policy Alliance, which also includes Mars Inc., Krispy Kreme Doughnuts Inc. and Hershey Co., wants to import more from Brazil, the world’s largest producer of the sweetener. Sugar prices in New York have jumped to the highest in 28 years. “Without allowing additional imports to enter the market, consumers will pay higher prices and domestic food manufacturing jobs will be at risk,” the alliance said today in a statement. Sugar is the only major U.S. crop under import restrictions. The U.S. limits shipments to benefit the domestic industry. Imports are managed through programs that limit purchases from almost all countries. Source: Bloomberg, 7 August 2009 Extract 3: Shielding Sugar – Does Everyone Benefit Protecting the US sugar industry from foreign competition is costing thousands of jobs, with confectionery companies emigrating to countries with lower sugar prices, according to a government report published on Tuesday. The report, by the Commerce Department, said efforts to shield domestic sugar producers from competition resulted in the loss of more than 10,000 jobs between 1997 and 2002. The industry is one of the most protected in the US, leading to sugar prices that are more than double the market rate. “To compete and win in the world economy we must lift the price burden for US businesses that use sugar as a product ingredient,” said Franklin Lavin, undersecretary at the Commerce Department. “For every sugar-growing and harvesting job saved through high sugar prices, approximately three confectionery manufacturing jobs are lost.” Many confectioners have relocated to Canada, where sugar prices are less than half of those in the US. Source: The Financial Times, 14 February 2006

PJC H1 Prelim 2011 3 Extract 4: The Everglades – Sugar And The Environment Florida’s politicians have debated for years with environmentalists over how to restore the Everglades wetlands to their natural state. The obstacles are huge, principally because a large swathe of valuable sugar-cane farmland lies in the middle of the proposed conservation area. The growth of Orlando to the north, combined with intense agriculture and federally built drainage canals to prevent flooding, have in recent decades fatally disrupted and polluted the ecosystem of the Everglades. Experts have said for years that without drastic action America’s largest subtropical wetland was in grave danger, along with endangered species such as the Florida panther and the American crocodile. Phosphorus-laden water has also seeped into the St Lucie and Caloosahatchee estuaries, poisoning oyster beds and causing harmful algae blooms. But now, to the surprise of many, Florida’s governor, Charlie Crist, has come up with a bold plan to buy 180,000 acres of land from one of the two main sugar producers, US Sugar Corp. The idea is to use this land to restore the natural flow of water from Lake Okeechobee into the marshy Everglades—the “river of grass”, as a leading environmentalist once called them. Good news for the alligators and all their advocates, but this will cost $1.75 billion in taxpayer funds. Environmental experts propose a different solution. U.S. Sugar, they suggested, was only able to farm profitably in the Everglades because of massive government subsidies of the sugar industry. Without government subsidies, the U.S. sugar industry might have gone out of business the old-fashioned way--bankruptcy. Thereby relieving pressure on the environment. Adapted from: Forbes.com 30 June 2008 and The Economist, 11 December 2008 Figure 1: Refined Sugar Prices U.S vs. World, 1980 - 2010 Source: United States Department of Agriculture

PJC H1 Prelim 2011 4 BLANK PAGE

PJC H1 Prelim 2011 5 Questions (a) (i) Describe the trend in world sugar prices between 1990 and 2009. [2] (ii) Using demand and supply analysis, account for the changes in the world price of sugar in 2009. [4] (b) (i) Compare the price of sugar in the US with that of the world market. [2] (ii) Comment on why the US government protects the domestic sugar industry. [6] (c) (i) Explain what is meant by negative externalities. [2] (ii) Explain how government intervention through subsidies leads to a worsening of market failure in the cultivation of sugar cane. [6] (d) Assess the policies proposed to the US government to correct market failure with regard to sugar production. [8] [Total: 30] [Turn over

PJC H1 Prelim 2011 6 Question 2: The Price of Green Shoots Extract 5: Deeper recession ahead says IMF The International Monetary Fund (IMF) projects a deeper recession ahead as the world’s major economies like US, UK, Germany, Japan and Italy shrunk by between 4 to 6 % in 2009. The prospects for world trade are even gloomier, with the IMF now forecasting world trade volumes to decline by 11% in 2009. After 60 years as the engine of world growth, the sharp fall in trade is now hitting many of the leading exporting nations, particularly in Asia. In response, the world economy has been injected with the biggest Keynesian cocktail yet seen in peacetime. In the past 18 months, Central banks have slashed interest rates while Finance ministries have cut taxes and boosted public spending to fight financial seizure and recession. Source: Adapted from news.bbc.co.uk, 22 April 2009 Figure 2: Interest Rates (Selected Economies) Source: Adapted from www.economist.com, 11 February 2010 Extract 6: Spanish Illness: Europe’s Worst Unemployment Problem The huge signs ar