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ECONOMICS 9732/01
Higher 2

Paper 1 25 August 2009

2 hours 15 minutes

Additional Materials: Writing paper

SERANGOON JUNIOR COLLEGE
JC2 Preliminary Examination

READ THESE INSTRUCTIONS FIRST

Write down your name and civics group 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 all your work securely together.
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.

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Answer all questions.

Question 1
The Pharmaceutical Industry

Extract 1

In the fight for a larger pie, pharmaceutical companies have moved from being a mature industry
making billions, to one that is finding it increasingly difficult to sustain performance. Today, the
industry faces numerous challenges like lengthy and risky initiatives in R&D, negotiating a diverse
and stringent set of regulatory frameworks in new markets and creating new intellectual property
in view of increasing competition and declining sales in developed markets. Pharmaceutical
companies have tried to address this by massive consolidation to achieve greater economies of
scale and a rapid scale up in sales and marketing activity to broaden reach.

Source: outsourcing notes.com, August 2008



Extract 2

Recently, the President of Brazil issued a compulsory license to the producers of a lower-cost,
generic version of Merck's antiretroviral drug, Efavirenz. And in March, Thailand's new
government also issued compulsory licenses for a clutch of innovative medications, including
three for cancer.

The World Trade Organisation allows national governments to revoke patents for use in urgent
and emergency situations without consulting the foreign patent owner.

Compulsory licenses have triggered a spate of challenges to pharmaceutical's intellectual
property in emerging economies like those of India, Thailand and Brazil. Now those challenges
are starting to extend to biotech patents.

Sources: various



Extract 3

The UK National Health Service (NHS) spends about 11 billion a year on treatments, 8 billion
of which is on branded drugs. One of the main instruments employed by the UK Health
Departments to control NHS expenditure on these branded drugs is the Pharmaceutical Price
Regulation Scheme.

The workings of the scheme are complex, but at a broad level it comprises the following:
x profit controls, which set a maximum level of profits that a company may earn from the
supply of branded drugs to the NHS and
x price controls, which impose restrictions on price of drugs.

Source: Department of Health, UK

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Extract 4

Developing Asian economies have maintained high levels of economic growth in recent years,
particularly since the late 1980s. Before then, these economies were unable to mobilize enough
domestic savings to fulfill their huge investment requirements and sustain growth. Even though
their savings rates were relatively high, the amount of capital needed was enormous. Also,
financial intermediation was limited because domestic financial and capital markets were not
developed enough to supply sufficient long-term capital to domestic firms. To overcome the
shortage of capital and sustain growth, Asian governments actively and successfully promoted
inward foreign direct investment (FDI). Despite the economic stagnation and other severe effects
of the 1997 financial crisis, the growth potential of the developing economies of Asia is still
considered high compared to most other developing countries. The capital requirements to
sustain developing Asia's robust growth continue to be very high.

A key factor that enabled Asian economies to sustain high growth rates was foreign demand for
manufactured goods produced by these countries. Accordingly, Asian economic growth often
has been characterised as export-led development. Multinational corporations (MNCs) in
developed countries invested in developing Asian economies to profit from factor endowments
that account for the region's comparative advantage, particularly low labor costs. This was
instrumental in promoting the export of manufactured goods from developing Asian economies.
Initially, FDI concentrated on relatively low value-added and labor-intensive industries, such as
textiles and food processing. Subsequently, however, high value-added industries such as those
for electronic components and pharmaceuticals benefited from considerable FDI.

Source: adb.org, 2007

Table 1: Comparison of drug prices

Country 2000 2001 2002 2003 2004 2005
France 80 81 81 91 84 96
Germany 91 94 95 102 106 108
Italy 79 82 86 90 78 84
USA 209 217 201 190 176 198
UK 100 100 100 100 100 100
Source: Department of Health, UK


Table 2: World Pharmaceutical Corporations, 2007

Corporation Market share (%)
Pfitzer 6.7
GlaxoSmithKline 5.6
Novartis 5.1
Sanofi Aventis 5.0
Top 4 corporations 22.4
Top 10 corporations 44.9
Source: Association of the British Pharmaceutical Industry

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Figure 1: % Share of Non-Oil Domestic Exports, Singapore






















Source: International Enterprise, Singapore


Questions

(a) (i) Compare the changes in the relative prices of drugs among the different countries
shown in Table 1. [2]

(ii) Suggest two possible reasons for the difference in prices of drugs in Italy and
Germany in 2005. [3]


(b) Using the information available, account for the degree of market concentration in the
pharmaceutical industry. [4]


(c) Using economic analysis and with the aid of a diagram, explain the possible impact of
"compulsory licenses on the profits of the manufacturers of patented drugs. [5]


(d) With reference to Extract 3, discuss whether government regulation of the pharmaceutical
industry always serves the interests of the society. [6]


(e) With reference to the data and your own knowledge, discuss the extent to which rising foreign
direct investment is of benefit to Singapore and other recipient countries. [10]

[Total: 30]
2001 2008
Machinery & Transport Equipment

Miscellaneous Manufactured Goods

Chemicals Non Pharmaceutical

Pharmaceutical

Manufactured Goods

Others





Per
cent

100


80


60


40


20


0
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Question 2
The Global Recession

Extract 5: Houses of cards

Record-low interest rates in the past such as in 2001, 2002 and 2003 did not lead Americans to
invest more. Instead, easy money stimulated the economy by inducing households to increase
their borrowing as rising house prices allow them to get loans more easily from banks. Much of
the borrowed funds were used for consumption and speculation in property. As a result,
America's household savings rate was at levels not seen since the Great Depression, either
negative or zero.

But with higher interest rates depressing housing prices, the game is over. As America moves to,
say, a 4% savings rate (still small by normal standards), aggregate demand will weaken, and with
it, the economy.
Adapted from guardian.co.uk, 9 October 2007


Extract 6: Federal Reserve slashes interest rates to nearly zero

The Federal Reserve slashed interest rates in the United States last night to 0.25% and signaled
new emergency steps to boost lending as it sought to lift the world's biggest economy out of a
deepening recession.

The central bank said that the bleak outlook for jobs, investment and growth justified cutting
interest rates from 1% to drive down borrowing costs for companies and homeowners.

Critics however warned against slashing interest rates to nearly zero. They cited Japan which
had a zero interest rate policy for six years. Recently, Japan raised interest rates for fear of
increased risk of price instability.
Adapted from guardian.co.uk, 17 December 2008


Extract 7: Uncle Sam - US$407 billion in the hole

The financial crisis saw a substantial increase in US government spending and a halt in the
growth of tax revenues. Government bailouts of insolvent financial institutions such as Fannie
Mae and Freddie Mac and generous tax rebates were necessary to avert an economic meltdown.
The ongoing military campaign in Iraq and Afghanistan had not improved the situation.

Foreign creditors have raised concern about the US government fiscal (mis)management.
Foreigners own half of the US public debt. Of the total, China was the largest creditor followed by
Japan and the EU countries. The oil exporters, Russia, the UK and Brazil are also large single
holders of US debt.

There were fears that US creditors will dump Treasury securities due to a loss in confidence in
the US economy. However such fears are overblown as the US market should be expected to still
have considerable relative appeal once things return to a new normal, particularly in view of
limited prospects in other countries.
Source: various

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Extract 8: Going green makes sound sense

The Singapore government in its attempt to cushion the impact of the financial crisis has brought
forward its plans to invest in the environment. Investing in the environment is an economically
sound decision during a financial crisis. The government plans to spend S$1 billion over the next
five years on sustainable development initiatives. These include promoting energy efficiency in
industries and households in the form of subsidies and tax rebates, and investing in green
transport, clean energy and the greening of our living spaces. The government has also allocated
S$695 million to transform Singapore into a City in a Garden, thus providing leisure and reducing
urban heat. People may now have more time to spend on leisurely pursuits.

Adapted from The Straits Times, 24 March 2009



Extract 9: Extraordinary measures to tide through extraordinary times

The Singapore government just announced an impactful budget for fiscal year 2009 that will help
businesses and people in Singapore tide through an expected difficult year in 2009. Singapore
was also willing to use its reserves in this period of extraordinary economic uncertainty.

The comprehensive S$20 billion Resilience Package is targeted at preserving and creating jobs,
and easing costs for businesses. It includes the S$4.9 billion Jobs Credit Scheme. This scheme
subsidises employers' wage bills, where employers will receive from the government a 12% cash
grant on the first S$2,500 of monthly wages of each local employee. In addition, the government
will spend S$4.4 billion on developing first-class infrastructure for the island and on expanded
provisions for education and healthcare. The government will also spend S$2.6 billion to support
Singaporean households this year, with more tax rebates for the lower income earners.

However, Prime Minister Lee Hsien Loong has said that Singapore will not emerge from the crisis
until the global economy starts to heal. In large countries such as Brazil, China and the United
States, more consumption and other pump-priming or fiscal stimulus measures would work, given
their huge populations who would be consuming domestic products.

Adapted from The Straits Times November 2008 and The Budget Report, 22 January 2009



Table 3: US Key Economic Indicators

Budget Balance
Year GDP Growth
Rate (%)
Unemployment
Rate (%)
US$ billions % of GDP
2005 2.9 5.0 -318.3 2.6
2006 2.7 4.6 -248.1 1.9
2007 2.0 4.2 -162 1.2
2008 1.1 5.8 -410 2.9

Source: various


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Questions

(a) Explain what is meant by a recession. [1]



(b) Using the information available, discuss the extent to which a near-zero interest rate is desirable. [6]



(c) (i) With reference to Table 3, describe the trend of the US budgetary position between 2005 and
2008. [2]

(ii) Account for the trend observed in (c) (i). [3]

(iii) Explain whether the US budgetary position is a cause for concern. [4]



(d) During the current economic downturn, the Singapore government implemented a slew of policy
measures.

(i) With reference to Extract 8, examine the view that investing in the environment during a
financial crisis is an economically sound decision for the society. [6]

(ii) Assess the effectiveness of the extraordinary policy measures in Extract 9, implemented by
the Singapore government to achieve economic recovery. [8]

[Total: 30]







End of Paper