Economics 9708/23 October/November 2020: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 3 Data Response and Essay, October/November 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Malaysia’s persistent trade surplus
Malaysia has the third highest income per head in South East Asia and, in the last six years, has experienced an average rate of growth approaching 6% per year. It is now a successful ‘newly industrialised market economy’ with a strong export sector. This strength is seen in its consistent surplus on its balance of trade in goods and services (see Fig. 1.1).
In the past, Malaysia’s economy was firmly based on the production of basic raw materials such as rubber and tin. In more recent years, however, its growing prosperity has come about through it being a leading exporter of electrical appliances, electronic parts, petroleum and natural gas.
China is its biggest export market, accounting for 16% of total exports in 2016, and a further 11% of exports go to the European Union (EU). Malaysia’s economy though remains vulnerable to external shocks like the global financial crisis of 2007–2008, which led to capital outflows.
Despite what appears to be a strong external trade position, the foreign exchange rate of
Malaysia’s currency, the ringgit (RM), against the US dollar has experienced significant change since 2013 (see Fig. 1.2). Given the importance of trade in goods and services to its economy, any volatility and uncertainty of the ringgit’s value may well hinder Malaysia in its drive to become a
‘high income economy’.
Source: adapted from tradingeconomics.com/articles, accessed April 2018
35 000
30 000
Balance 25 000 of trade 20 000
(RM million) 15 000
10 000
5000
0
Oct–13
Oct–14
Oct–15
Oct–16
Jul–13
Jan–14
Apr–14
Jul–14
Jan–15
Apr–15
Jul–15
Jan–16
Apr–16
Jul–16
Jan–17
Apr–17
Jul–17
Fig. 1.1 Malaysia balance of trade in goods and services, July 2013–July 2017 (RM million)
Source: tradingeconomics.com, accessed April 2018
4.6
4.4
4.2
RM per US dollar
4.0
3.8
3.6
3.4
3.2
3.0
2.8
Jul–13 Jan–14 Jul–14 Jan–15 Jul–15 Jan–16 Jul–16 Jan–17 Jul–17
Fig. 1.2 Malaysia/US foreign exchange rate, July 2013–July 2017
Source: US Federal Reserve
(a) State whether the Malaysian ringgit depreciated or appreciated against the US dollar over the period July 2013 to July 2017. Justify your answer. [2]
(b) (i) Describe the relationship you would expect between a change in the foreign exchange rate of a country and its balance of trade in goods and services. [2]
(ii) Explain whether the evidence in Fig. 1.1 and Fig. 1.2 confirms this relationship. [2]
(c) In July 2017, Malaysia’s balance of trade in goods and services was RM22 045 million and its current account balance was RM9642 million.
Explain the reason for this difference. [2]
(d) Other than exchange rate changes, explain two possible reasons for Malaysia’s increasing balance of trade in goods and services surplus from July 2016 to July 2017. [6]
(e) Discuss whether the Malaysian government should be concerned about persistent surpluses in its balance of trade in goods and services. [6]
Section B
Answer one question.
Mark scheme
1(a) State whether the Malaysian ringgit depreciated or appreciated 2 The ringgit has depreciated from 3.1RM to 4.2RM per
against the US dollar over the period July 2013 to July 2017. US dollar.
Justify your answer.
It is necessary to state that the ringgit has
The Malaysian ringgit depreciated (1 mark) depreciated for the first mark.
So the Malaysian ringgit is worth less dollars (or the US dollar is worth The candidate does not need to provide precise
more ringgits) (1 mark) figures. Figure 1.2 makes it clear that the Malaysian
ringgit is now worth less dollars or the US dollar is
Max 2 marks worth more ringgit. A clear statement along these
lines is sufficient for the second mark.
1(b)(i) Describe the relationship you would expect between a change in 2 In general, a depreciation of a foreign exchange rate
the foreign exchange rate of a country and its balance of trade in should lead to a positive change in the balance of
goods and services. trade e.g. a deficit becomes a surplus.
For description of a fall in the exchange rate and an increasing surplus An appreciation should lead to a negative change in
or a decreasing deficit (1 mark) the balance of trade e.g. a surplus becomes a deficit.
And
How the change in the foreign exchange rate actually
For description of a rise in the exchange rate and a decreasing surplus affects the balance of trade is determined by the
or an increasing deficit (1 mark) price elasticity of demand for exports and imports, but
this is not required.
Max 2 marks
1(b)(ii) Explain whether the evidence in Fig. 1.1 and Fig. 1.2 confirms this 2 If a candidate reverses the direction of causation this
relationship. can be allowed if explained well.
In general the information in the two figures does not confirm this
relationship because the two graphs do not appear to be closely related
(1 mark) for reference to the data to illustrate a time period when the
relationship is not confirmed or they can refer to a time period when the
relationship is confirmed (1 mark)
Max 2 marks
1(c) In July 2017, Malaysia’s balance of trade in goods and services 2 Accept older terms to describe the components of the
was RM22045 million and its current account balance was RM9642 current account balance of trade. For example, the
million. income account or current transfers.
Explain the reason for this difference. If the candidate states that ‘other parts’ of the current
account might be absent then allow 1 mark.
The difference can be attributed to the absence of Primary and
Secondary income balances. (1 mark)
For an explanation that the sum of these two missing balances must be
negative. (1 mark)
Max 2 marks
1(d) Other than exchange rate changes, explain two possible reasons 6 There are many possible reasons for Malaysia’s
for Malaysia’s increasing balance of trade in goods and services increasing surplus on the balance of trade.
surplus from July 2016 to July 2017. Candidates should identify a possible reason and
then explain why the factor identified could lead to an
For identification of a valid reason (1 mark) and for accompanying increasing surplus.
explanation (2 marks)
For example, government intervention such as
subsidies to export industries (1 mark) this will
reduce the price of exports (1 mark) and make
Malaysian goods and services more competitive in
world markets (1 mark)
An increase in the rate of direct taxes in Malaysia (1
mark) will reduce disposable incomes (1 mark) and
make imports less affordable (1 mark)
Allow any valid reason.
1(e) Discuss whether the Malaysian government should be concerned 6 Persistent surpluses on the balance of trade in goods
about persistent surpluses in its balance of trade in goods and and services could increase aggregate demand in
services. Malaysia leading to high employment and a rise in
real GDP. This is a positive outcome, but it could
Award up to 3 marks for analysis of the advantages of a surplus. generate demand-pull inflation if the economy is
operating at full capacity. In addition, if the surpluses
Award up to 3 marks for analysis of the disadvantages of a surplus. are maintained through government intervention
there might be tension with trading partners and
5 marks maximum competitors. This might lead to retaliation.
Reserve 1 mark for an evaluative comment that makes clear whether
the Malaysian government should or should not be concerned.
(a) Using diagrams, explain what might cause a market to be in disequilibrium, and how market forces would lead to equilibrium being restored. [8]
(b) Discuss whether the incidence of an indirect tax on a product always affects its consumers more than its producers. [12]
Mark scheme
2(a) Using diagrams, explain what might cause a market to be in 8 A market is in equilibrium when, given present
disequilibrium, and how market forces would lead to equilibrium circumstances, there is no tendency for change. In
being restored. other words demand and supply are equal with an
equilibrium price and quantity. The market clears at
For knowledge and understanding: using a diagram to show this point.
equilibrium in a market (1 mark) with a clear statement of what is meant
by ‘equilibrium’ (1 mark) Disequilibrium will occur when either the demand
2 marks curve or supply curve shifts. Change will have to
come about to restore equilibrium.
For application: that shows disequilibrium in a market and why it might
arise. A shift in the demand or supply curve (1 mark) with a cause of Equilibrium is restored through price changes or
this shift (1 mark) and the disequilibrium in terms of an excess demand changes in demand and/or supply in the market.
or excess supply (1 mark) and the new equilibrium price and quantity
indicated (1 mark) Accept maximum or minimum prices as a cause of
disequilibrium.
And application that explains how the new equilibrium is restored by
market forces (Up to 2 marks)
2(b) Discuss whether the incidence of an indirect tax on a product 12 Incidence refers to the relative impact of an indirect
always affects its consumers more than its producers. tax on consumers and producers. The extent of the
incidence depends on the price elasticity of demand
Analysis: and supply of the product. The more inelastic the
Up to 4 marks for an explanation of the incidence of an indirect tax and PED, the greater the burden of the tax on consumers
how it affects consumers in terms of the price paid and the consumer and so on.
surplus with due reference to the price elasticity of demand and supply.
Evaluative comment might consider those goods that
Up to 4 marks for an explanation of the incidence of an indirect tax and are habit forming and often considered as demerit
how it affects producers in terms of the price received and the producer goods in terms of the impact of an indirect tax on
surplus with due reference to the price elasticity of demand and supply. incidence and consumption.
8 marks max
Up to 4 marks for evaluation. Reserve 1 mark for a clear conclusion of
whether it is always consumers rather than producers who are most
affected.
Up to 4 marks maximum
(a) Explain what is meant by income elasticity of demand and, with the help of examples, show how it can be used to determine whether a good is normal or inferior. [8]
(b) Discuss whether knowledge of price elasticity of demand or price elasticity of supply is more useful for a car manufacturer. [12]
Mark scheme
3(a) Explain what is meant by income elasticity of demand and, with 8 Income elasticity of demand is a numerical measure
the help of examples, show how it can be used to determine of the responsiveness of demand following a change
whether a good is normal or inferior. in income. A formula is equally acceptable. The sign
and size are important when determining whether a
For knowledge and understanding: up to 2 marks for an explanation good is normal or inferior.
of the concept. What it measures (1 mark) and the formula (1 mark)
For application to different types of good.
Normal goods have a positive sign (1 mark), and why this comes about
(1 mark). This should be justified with an appropriate example to
illustrate the case (1 mark)
3 marks
Inferior goods have a negative sign (1 mark), and why this comes about
(1 mark). This should be justified with an appropriate example to
illustrate the case (1 mark)
3 marks
8 marks max
3(b) Discuss whether knowledge of price elasticity of demand or price 12 The idea behind this question is for candidates to
elasticity of supply is more useful to a car manufacturer. consider the two elasticities and say which one
provides the best information in this context. Each
For analysis: measure should be analysed. Re-PES, it is relevant
to explain that this will show whether the
Up to 4 marks for an explanation of the usefulness of PED to a car manufacturer has the capacity to produce more or
manufacturer. less as price changes. Reference to the ability to
produce vehicles for stock is relevant. PED is most
Up to 4 marks for an explanation of the usefulness of PES to a car useful when the manufacturer is looking at whether to
manufacturer. change the price of vehicles.
8 marks max
For evaluation; that compares the usefulness of the two measures (up
to 3 marks) to arrive at a reasoned conclusion (1 mark)
Up to 4 marks maximum
A government embarks on a supply-side policy involving substantial additional funding for new road schemes and for new training schemes designed to raise labour productivity.
(a) Use an AD/AS diagram to explain the effects of this funding on the level of output in the economy. [8]
(b) Discuss the extent to which a supply-side policy involving new road schemes and new training schemes will increase the rate of inflation in the economy. [12]
Mark scheme
4(a) A government embarks on a supply-side policy involving 8 In the short run there will be an increase in Aggregate
substantial additional funding for new road schemes and for new Demand. This can be shown by a shift of the AD
training schemes designed to raise labour productivity. function to the right. Longer term, the AS function
Use an AD/AS diagram to explain the effects of this funding on the may also shift to the right as the quality of the labour
level of output in the economy. force increases.
For knowledge and understanding: For an accurate AD/AS diagram
that shows national output in equilibrium (2 marks)
For application: For a clear understanding of aggregate demand (1
mark) using an accurate diagram to show that the AD curve will shift to
the right because of the increase in government spending (1 mark) and
that this will increase the level of national output (1 mark)
For a clear understanding of aggregate supply (1 mark) using an
accurate diagram to show that the AS curve will shift to the right
because of the increase in productivity (1 mark) and that this will
increase the level of national output (1 mark)
8 marks max
4(b) Discuss the extent to which a supply-side policy involving new 12 An increase in the rate of inflation is likely to occur in
road schemes and new training schemes will increase the rate of the short run, if following the increase in AD, there is
inflation in the economy. no spare capacity in the economy. The increase in
the rate of inflation may be reduced if the increase in
For analysis of supply side policies with reference to the aims and why AS provides more capacity.
the rate of inflation might not increase (up to 4 marks)
Evaluative comment might refer to the scale of
For analysis of the impact upon AD and why the rate of inflation might additional funding and how these resources have
increase. (up to 4 marks) been funded. Or it might refer to the distinction
between the short-run and long-run impact.
8 marks max
For evaluation: that considers whether the overall effect will be to
increase the rate of inflation with 1 mark reserved for a reasoned
conclusion.
4 marks max
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Economics 9708/23 for October/November 2020 is out of 40 marks, with 1 hour 30 minutes to answer it.
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