Economics 9708/23 May/June 2019: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 2 Data Response and Essay, May/June 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Difficult times for OPEC and Nigeria
The Organisation of Petroleum Exporting Countries (OPEC) has 13 members and produces over
30 million barrels of oil a day, responsible for half of global production. Its members, strongly influenced by Saudi Arabia, seek to limit the supply of oil in order to sustain stable prices to aid their own economic development.
OPEC members have become concerned about the increase in oil production in the United States
(US) due to the use of fracking (a new technique for extracting oil) and its impact on world oil prices and OPEC’s own market share. In 2014, OPEC decided to increase its own supply of oil in a bid to bankrupt higher-cost US producers. The effects were remarkable. A 12% increase in
OPEC’s production saw the world price fall by around 60% to less than US$30 per barrel. This was much lower than US producers’ costs but it led to a 45% cut in OPEC’s oil revenue.
In late 2016, it was clear that governments in OPEC countries were suffering from reduced oil revenues. There was also growing evidence that US oil producers had been able to cut costs to remain competitive with OPEC, even though the world price was still well below US$50 per barrel.
This was thought to be the minimum price for producing oil in the US. In a surprising change of policy, OPEC decided to cut its oil production by 3%. The result was a 10% increase in the world price of oil.
Nigeria is the largest economy in Africa. It produces around 8% of OPEC’s total oil supply which accounts for over 80% of Nigeria’s export revenue. Nigeria’s economy has been seriously affected by OPEC’s decision to increase supply on the world market. Its Gross Domestic Product (GDP), a measure of total national output, has continued to fall along with oil output. The slowdown in the economy has affected taxation paid to the government. In addition import restrictions have been put in place to try to offset a severe shortage of foreign currency.
Source: Sunday Telegraph 4 December 2016
Fig. 1.1 and Fig. 1.2 show the changes in Nigeria’s crude oil production and the relative changes in oil output from 2015 to 2016.
Fig. 1.1: Nigeria’s oil output, 2015–2016
2.5
2
Oil output 1.5
(million barrels per day) 1
0.5
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2015 2016
Fig. 1.2: Nigeria’s annual growth rates for oil production
10
5
0
Annual
–5 percentage (%) growth rate –10
–15
–20
–25
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2015 2016
Source: Nigerian Bureau of Statistics, 2016
(a) Describe, using Fig. 1.1, the change in oil production in Nigeria between 2015 and 2016. [2]
(b) Compare, using supply and demand diagrams, how OPEC’s decisions affected the world price of oil in 2014 and in 2016. [4]
(c) ‘The demand for OPEC’s oil is price inelastic.’
What evidence is there in the information to support this claim? [2]
(d) Fig. 1.2 shows that production in Nigeria’s oil sector declined sharply from Q1 of 2016. During this period, total national output for Nigeria fell by an annual rate of only around 2%.
What can be inferred from this about the relative importance of the non-oil sectors in Nigeria?
[2]
(e) Analyse, using aggregate demand and aggregate supply, two likely effects of OPEC’s policies on the economy of Nigeria. [4]
(f) Discuss, with the help of the information, the extent to which OPEC will be able to control the world price of oil. [6]
Section B
Answer one question.
Mark scheme
1(a) Describe, using Fig. 1.1, the change in oil production in 2 1 mark for any of these points
Nigeria between 2015 and 2016.
1 mark each for:
• Oil production has fallen over the period
• From around 2.2 million barrels to around 1.6 million barrels
• The most rapid fall was between quarter 1 and quarter 2 in
2016
(2 marks maximum)
1(b) Compare, using supply and demand diagrams, how OPEC’s 4 In 2014, OPEC’s policy has been to increase its supply
decisions affected the world price of oil in 2014 and in 2016. of oil on the world market. This can be represented by a
shift to the right of the world supply curve, producing a
For an accurate diagram that shows the increase in the supply of new equilibrium position with a lower price but an
oil in 2014 and the fall in price. (Up to 2 marks) increase in the quantity of oil traded.
For an accurate diagram that shows the decrease in the supply of In 2016, OPEC decided to reduce supply. This can be
oil in 2016 and the rise in price. (Up to 2 marks) shown with a shift to the left of the world supply curve,
leading to a fall in supply and a rise in the world price.
4 marks maximum
Two correct diagrams or a combined diagram is
acceptable.
1(c) ‘The demand for OPEC’s oil is price inelastic.’ What evidence 2
is there in the information to support this claim?
1 mark each for:
• Fall in world price (of 60%) and fall in OPEC oil revenue (of
45%)
• This means that since the % fall in price must be greater
than the % rise in quantity demanded and the price must be
inelastic
1(d) Fig. 1.2 shows that production in Nigeria’s oil sector declined 2 The data refers to a fall in GDP and an economic
sharply from Q1 of 2016. During this period, total national slowdown due to the increase in 2015 and up to Q3 in
output for Nigeria fell by an annual rate of only around 2%. 2016.The fall in non oil growth rate is not as severe as
What can be inferred from this about the relative importance of for oil growth. This would indicate that the non oil sector
the non-oil sectors in Nigeria? is of much greater economic importance for the
economy.(The non oil sector is responsible for around
For a comparison of the change in oil sector output and the non-oil 90% of output)
sector output 1 mark
If a candidate develops an explanation that this might
For the correct conclusion that the non oil sector is relatively more not be the case, for example through the multiplier
important 1 mark effect, then 2 marks can be awarded if the explanation
is valid.
1(e) Analyse, using aggregate demand and aggregate supply, two 4 From 2014 to 2016 OPEC increased the supply of oil
likely effects of OPEC’s policies on the economy of Nigeria. and reduced price.
Reference to two policies is essential for full marks. In late 2016 OPEC reduced the supply of oil and
increased price.
For explaining the likely effects on Nigeria of OPEC’s policy of
increasing supply and reducing price Up to 2 marks Reward valid use of AD/AS analysis.
For explaining the likely effects on Nigeria of OPEC’s policy of
cutting supply and increasing price Up to 2 marks
1(f) Discuss, with the help of the information, the extent to which 6 The data states that OPEC produces half of the global
OPEC will be able to control the world price of oil. production of oil. By varying the volume of production it
can influence the market price. On the other hand
For an explanation of how OPEC can influence the world price of OPEC’s market power is constrained by a number of
oil with reference to the data. 1 mark factors. These include the rise of oil production in the
US through ‘fracking’ and the need for government
For an explanation of any factors that undermine OPEC’s influence revenues amongst OPEC member countries.
on the world price of oil Up to 4 marks
For evaluative comment on the extent to which OPEC can control
the price 1 mark
(a) Using examples, explain why merit goods are said to be under-consumed and demerit goods are over-consumed. [8]
(b) Discuss whether merit goods should always be subsidised and demerit goods always taxed.
[12]
Mark scheme
2(a) Using examples, explain why merit goods are said to be 8 The main point here is to recognise the nature of
under-consumed and demerit goods are over-consumed. information failure and why it leads to under and over
consumption.
Knowledge and understanding of the nature of information failure
(1 mark) and that this leads to under-consumption and over- Examples of each type of good with a relevant applied
consumption of some goods in the market (1 mark) explanation of information failure are required to
enhance the quality of the answer.
(KU: up to 2 marks)
Application:
Explaining why merit goods are under-consumed (2 marks) and
with an appropriate example (1 mark).
Explaining why demerit goods are over-consumed (2 marks) and
with an appropriate example (1 mark).
(APP: up to 6 marks)
2(b) Discuss whether merit goods should always be subsidised 12 It is usual but by no means always true that merit goods
and demerit goods always taxed. are subsidised and that demerit goods are subject to
indirect taxation. This happens a lot but there are other
Analysis: means of increasing and decreasing consumption. The
Of the benefits of subsidisation of merit goods (up to 3 marks) clue in the question is ‘always’ which can form the basis
compared with other methods to increase their consumption (1 of the evaluative judgement.
mark).
And of the benefits of taxation of demerit goods (up to 3 marks)
compared with other methods to decrease their consumption (1
mark).
(AN: up to 8 marks)
Evaluation:
Of the idea that merit goods should always be subsidised and
demerit goods should always be taxed. Reserve 1 mark for a
reasoned conclusion.
(EV: up to 4 marks)
(a) Explain the difference between the causes of cost-push inflation and demand-pull inflation.
[8]
(b) Discuss the most serious problems faced by an economy with a high and increasing rate of inflation. [12]
Mark scheme
3(a) Explain the difference between the causes of cost-push 8 At AS level inflation is seen as the result of a shift in AD
inflation and demand-pull inflation. or AS. Good answers will distinguish the two causes
through reference to a shift to the right of AD or a shift
For knowledge and understanding of what is meant by to the left in AS.
‘inflation’(1 mark) with due reference to the relationship between
aggregate demand and aggregate supply (1 mark).
(KU: up to 2 marks)
Application
Explains the causes of cost push inflation. (Up to 3 marks)
Explains the causes of demand pull inflation. (Up to 3 marks)
(APP: up to 6 marks)
3(b) Discuss the most serious problems faced by an economy with 12 The internal effects include the impact upon savings
a high and increasing rate of inflation. and investment, the re-distribution of incomes that
might have a disincentive effect and menu costs.
Analysis:
Of the internal effects of high and increasing rates of inflation on an The external effects include the impact upon the
economy. (Up to 4 marks) exchange rate and the external balance and the
possibility of capital flight.
Of the external effects of high and increasing rates of inflation on
an economy. (Up to 4 marks)
(AN: up to 8 marks)
Evaluation:
Of which problems could be considered most serious (up to 3
marks) with 1 mark for a reasoned conclusion.
(EV: up to 4 marks)
(a) Explain the benefits of free trade as suggested by the principle of comparative advantage. [8]
(b) Despite the benefits of free trade, there has been a recent increase in protectionism by some developed and developing economies.
Discuss the possible reasons for this increase. [12]
Mark scheme
4(a) Explain the benefits of free trade as suggested by the principle 8 The principle of comparative advantage states that
of comparative advantage. specialisation and trade will be beneficial if there are
differences in the opportunity costs of production in two
Knowledge and understanding of the principle of comparative countries. Trade will not be beneficial if opportunity
advantage in terms of lowest opportunity costs (Up to 2 marks). costs are the same, if the exchange rate is outside the
opportunity cost ratios and if transport costs are very
(KU: up to 2 marks) high.
Application:
Explaining the benefits of free trade (4 marks) with due reference
to the limits of comparative advantage (2 marks).
(APP: up to 6 marks)
4(b) Despite the benefits of free trade, there has been a recent 12 The reasons for the rise of protectionism in developed
increase in protectionism by some developed and developing and developing economies are varied. These include
economies. Discuss the possible reasons for this increase. the protection of domestic industry to preserve
employment, to maintain balance in the current
Analysis: account, to prevent dumping and for strategic reasons.
That considers any reasons that developed economies might adopt
protectionist policies (up to 4 marks).
That considers any reasons that developing economies might
adopt protectionist policies (up to 4 marks).
(AN: up to 8 marks)
Evaluation:
That considers whether the arguments for protectionism are distinct
or the same in each type of economy (up to 3 marks) with 1 mark
for a conclusion.
(EV: up to 4 marks)
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Economics 9708/23 for May/June 2019 is out of 40 marks, with 1 hour 30 minutes to answer it.
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