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Answer all questions. Question 1 Extract 1: Biofuel and Shipping Industry Grain prices go the way of the oil price

According to the United States Department of Agriculture, rising prices for crops dubbed agflationhas begun to drive up the cost of breakfast. Underpinning these rises is a sharp increase in the prices of grains such as corn (maize) and wheat, both of which recently hit ten-year highs. Analysts are beginning to ask, as they have of oil and metals, whether higher prices are here to stay. In the coming year, the International Grains Council, an industry group, estimates that global production of grains will reach a record of 1,660m tonnes, well above last year's figure of 1,569m. But demand for grain is growing even faster. The council reckons it will reach 1,680m tonnes this year. The culprit is the growing use of grains to make biofuels, such as ethanol. Demand for animal feed, meanwhile, has grown steadily, as more people in booming countries such as China grow rich enough to afford meat. Demand for biofuel feedstocks is also soaring. The amount of corn used to make ethanol in America has tripled since 2000; ethanol distilleries now consume a fifth of the country's corn crop. And America is only one of 41 countries where governments are encouraging the use of biofuels to reduce oil consumption. The Economist Intelligence Unit projects that demand for corn, at least, will continue to exceed supply until at least 2009. Moreover, even to produce as much corn as they are now, farmers are growing less soya and wheat, and so pushing up the prices of those crops too. With all the main grains or animal feed becoming more expensive, the cost of meat and eggs is rising, and so it goes on. In order to meet up with demand boom, farmers will have to bring in more land into production. Greater adoption of genetically modified strains of corn and wheat, for example, could improve yields. But they are expensive and politically controversial. There is also quite a bit of fallow land to be sowed, especially in developing agricultural powers such as Brazil and Ukraine. But those countries with fallow land to be sowed are far from the biggest markets and their idle land tends to be found in areas with poor transport links. A strong price signal will be needed to overcome such obstacles and induce extra supplies. Source: Adapted from The Economist, 21 June 2007

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3 Extract 2: The craze for maize

Corn-based ethanol is neither cheap nor especially green: it requires a lot of energy to produce. Production has been boosted by economically-questionable help from state and federal governments, including subsidies, the promotion of mixing petrol with renewable fuels and a high tariff that keeps out foreign ethanol. Since oil prices rose above $30 a barrel in 2004 (they are more than double that now), ethanol capacity has grown especially rapidly. The federal government offers ethanol producers a subsidy of 51 cents per gallon (13.5 cents per litre). California banned the use of non-environmental friendly fuel, forcing individuals to use ethanol instead to meet clean-air standards. Local refineries for the product began popping up to cash in on a state subsidy of 40 cents per gallon at the time. A more serious long-term threat to ethanol industry might come from other biofuels. The federal government is already subsidising investments in cellulosic ethanol, which can convert a wide range of plant life into fuel, but is still very inefficient. Figure 1: Price per unit of potential energy Figure 2: US corn price

Source: Adapted from The Economist, 10 May 2007

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4 Extract 3: Southern California's competitive ports could get cleaner but less

Shipping is doing more than Hollywood to boost southern California's economy these days. The adjacent ports of Los Angeles and Long Beach1 are the biggest in the country. They are a giant job-creating engine, stimulating industrial and warehouse employment on a scale not seen in the region since the rise of the aerospace industry after the second world war. In California, approximately 371,000 jobs are supported, directly and indirectly, by port operations. About 85% of these jobs are within the southern California region. The source of these impacts is the billions of dollars spent annually by transportation companies, importers and exporters responding to consumer demand and the needs of other businesses. Nearly $3.3 billion a year is spent in the state for port-industry2 services. Expenditure for port-industry services, in turn, triggered spending by supporting businesses involved in moving and handling cargo, their suppliers, and by employees of these firms. These spending amounts to about $2.8 billion throughout the state. This combination of direct and spin-off spending provided for nearly 43,000 jobs and over $2 billion in wages and salaries. On the flipside, ships are also the biggest polluters, accounting for close to 60% of all diesel particles emanating from San Pedro bay. The most ambitious effort to control pollution, and the one that may affect the local economy most drastically, involves truckers. Some 16,000 lorries currently haul containers between ships and warehouses. The ports want to scrap the oldest trucks and gradually upgrade the others so that, within five years, the fleet emits four-fifths less pollution than at present. To help pay for this, they intend to levy a fee of $34 to $54 on every dirty vehicle entering the port. Most important, they want to turn a large, unwieldy network of independent contractors into a more orderly group of companies entering the ports. This measure aims to reduce air emissions and health risks, while allowing for the development of much-needed port efficiency projects. Critics, including truckers' associations, complain that the new charges will simply drive trade elsewhere. That is unlikely. The new generations of ships, which can carry more than 8,000 20-foot (6-metre) containers, are too big for the Panama Canal. Besides, the huge size of the southern Californian market means importers will still find it makes sense to ship goods through Los Angeles even if it costs them a premium to do so. The reforms do nonetheless pose a threat to the ports' competitiveness.
Los Angeles and Long Beach ports are located in southern California. Port-industry refers to businesses involved in moving and handling cargo. They include such activities as marine terminal operations, trade services, vessel services and inland transportation.
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5 Figure 3: Trade through Los Angeles and Long Beach ports Figure 4: Californias greenhouse emissions by end-use sector

Source: Adapted from The Economist, 26 April 2007 Questions (a) (i) (ii) (b) (c) (d) With reference to Figure 2, describe the trend of US corn price between 2005 and 2006. [2] Account for the trend observed in a(i). [4]

Using economic concepts, explain the possible link that exist between the production of Soya and Corn. [2] Comment on the governments effort in promoting the use of ethanol to meet clean-air standards. [6] Using the information from Extract 3, discuss the case for and against the levying of a fee on every dirty vehicle entering the Southern California ports. [6] With reference to the information given, discuss the effects of a growth in the port-industry on Californias economy. [10]

(e)

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6 Question 2 Growth of Indias economy in comparison to Chinas Table 1: Selected Indicators of Indias economy
2002 2003 2004 2005 2006 Real GDP growth 3.6 8.3 8.5 8.5 9.2 (%) Consumer price 4.3 3.8 3.8 4.2 6.2 inflation (%) Current-account 7,061.0 8,773.0 781.0 -6,854.0 -14,685.4 balance (US$ m) Exchange rate 48.61 46.58 45.32 44.10 45.31 Rs:US$ Source: Adapted from The Economist, Economist Intelligence Unit estimates.

Table 2: Selected Indicators of Chinas economy

2002 2003 2004 2005 2006 Real GDP growth 9.1 10.0 10.1 10.2 10.5 (%) Consumer price -0.7 1.2 3.8 1.8 1.3 inflation (%) Current-account 35.4 45.9 68.7 160.8 204.7 balance (US$ bn) Exchange rate 8.28 8.28 8.28 8.19 7.97 Rmb:US$ Source: Adapted from The Economist, Economist Intelligence Unit estimates.

Extract 4: Too hot to handle Despite widespread claims that China's economy is overheating, actually India's shows more signs of boiling over. India's economy displays an alarming number of signs that things have gone too far. Consumer-price inflation has risen to almost 7%. In a survey of 600 firms by the National Council of Applied Economics Research, an astonishing 96% of firms reported that they were operating close to or above their optimal levels of capacity utilisation. Firms are also experiencing a serious shortage of skilled labour and wages are rocketing. Companies' total wage costs in the six months to September were 22% higher than a year earlier, compared with an average increase of around 12% in the previous four years. India's current account has shifted to a forecast deficit of 3% of GDP this year from a surplus of 1.5% in 2003a classic sign of excess demand. Total bank lending has expanded by 30% over the past year, close to the fastest growth on record.
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7 Indian policymakers seem reluctant to admit that economic growth has exceeded its speed limit over the past three years, let alone slow it. India's trend growth rate has almost certainly increased but it is still nowhere near as high as China's. But India's recent acceleration largely reflects a cyclical boom, thanks to loose monetary and fiscal policy. India cannot grow as fast as China without igniting inflation because of its lower investment rate, particularly in infrastructure, and labour bottlenecks. The latest government figures, for the year ending in March 2005, put total investment at 30% of GDP, compared with over 45% officially reported in China. Source: The Economist, 23 November 2006 Extract 5: A budget for prices, farmers and votes. Shame about reform. Responding to the domestic pressures, Mr Palaniappan Chidambaram, India's finance minister produced a budget whose central theme was curbing price rises. He increased funds for education by 34%, while money for health and family welfare went up by 22%. By comparison, spending on defence will go up just 7.8%. He devoted a big chunk of his speech to agriculture, which is growing by only 2.7% a year, compared with a government target of 4%. That is a disappointment at a time when manufacturing and services are growing by over 11%, and merchandise exports by 36%. Other improved numbers include a savings rate of 32% of GDP and a combined central and state governments' fiscal deficit of 6.4% (see Figure 5)still whopping, but in line with reform targets. Mr Chidambaram said that agriculture must hold the first charge on our resources. He announced plans to boost credit to farmers, as well, disappointingly, as to increase fertiliser and water subsidies, which tend to benefit the better-off, and help cripple the budget in leaner times. The Confederation of Indian Industry, a business lobby group, said more should have been done to increase private-sector investment. But Mr Chidambaram said later that agriculture had to be tackled through the millions of small farmers rather than corporate investment. The hope is that such measures to boost agricultural supply will curb prices. He also announced duty reductions on a wide range of items. Source: The Economist, 1 March 2007

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Figure 5: Indias fiscal deficit

Figure 6: FDI inflows of India and China

Extract 6: The insidious charms of foreign investment China has two main attractions for foreign investors: a potentially vast domestic market; and an environment from which it is easy to export. The first of these has often proved chimerical in the past, and people with money for discretionary spending are still in a minority, though a far larger one than in India. China's other big advantage over India is its infrastructure. It has 30,000km (19,000 miles) of expressway, ten times as much as India, and six times as many mobile and fixed-line telephones per 1,000 people. Although last summer saw serious power shortages in parts of China, India's supply is far more unreliable. In India, 61% of manufacturing firms own generators, compared with 27% in China, where the cost of power is 39% lower than in India. Even Bangalore, epicentre of India's IT industry, suffers from traffic jams, overflowing hotels, power cuts and an inadequate airport. It risks throwing away its great advantage: that it has attracted a critical mass of the world's high-technology firms to what could be a self-sustaining cluster and boomtown. Source: The Economist, 3 Mar 2005

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9 Questions (a) (i) (ii) With reference to Table 1 and 2, assess the relative state of health of the two economies from 2002 to 2006. [4] Identify two other possible pieces of data you would find useful to assess the relative state of health of the two economies. Explain your choice. [4] Using economic analysis, explain how the information provided suggests that the Indian economy is in danger of overheating. [5]

(b)

(i) (ii)

Using the relevant indicators in Table 1, analyse the impact on the Indian economy if the policymakers are reluctant to slow the rate of growth. [6] Compare the trend in FDI inflows for India and China from 1998 to 2004. Account for the trend observed above in c(i). [1] [2]

(c)

(i) (ii)

(d)

Discuss the likely effects of the policy measures outlined by Mr Palaniappan Chidambaram on the economic objectives of the government. [8]

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