MINISTRY OF EDUCATION, SINGAPORE in collaboration with CAMBRIDGE ASSESSMENT INTERNATIONAL EDUCATION General Certificate of Education Advanced Level — Higher 4 ECONOMICS 8823/01 Paper 1 October/November 2021 3 hours No Additional Materials are required READ THESE INSTRUCTIONS FIRST ‘An answer booklet will be provided with this question paper. You should follow the instructions on the front ‘cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. ‘Answer all questions. The number of marks is given in brackets [ ] at the end of each question or part question, This document consists of 9 printed pages and 3 blank pages. BB carbsiee Assessment International Education on (Cason Examinations and Assessment Board ©UCLES & MOE 2021 Dc (MBVAR) 20492816 [Turn over2 ‘Answer all questions. Question 1: Intervention in the market for oil Extract 1; Factors influencing the world oll market Since the Organisation of Petroleum Exporting Countries (OPEC) and Russia agreed in late 2016 to reduce their combined production of crude oil in an effort to prevent the price from falling, the crude oil price has in fact increased by just over 50% ~ see Figure 1 below. The crude oil price recently hit a high of US$80 a barrel. Figure 1: Crude oil price, 2014-2018 (US$ per barrel) 1207 100} 80} USS per barrel 607 40} 20: Jan Jan Jan Jan Jan 2014 «2015 «2016» 2017-2018 Year There are a number of forces operating here; taken together they will have various effects on the international crude oil market. In the first place, demand remains unpredictable — the United States (US) economy is still currently booming, so demand there is growing, but China's economic slowdown, together with a slight downturn in Europe since late 2017, suggest that demand overall could fall. And supply, not taking into account the effect of the OPEC producers’ decisions in 2016, has its own issues: two major oil producing countries, Iran and Venezuela, face disruption that could reduce crude oil output, and in June 2018 the OPEC countries agreed to increase oil production by one million barrels per day. If indeed demand for crude oil falls and supply rises, price will be bound to respond in the predicted direction. Sources: The Observer, 20 May 2018 and The Guardian, 22 June 2018 Extract 2: US oil prices turn negative as demand dries up The price of US oil has turned negative for the first time in history. That means oil producers are paying buyers to take it away from them as they fear that their capacity to store oll could run out. Demand for oil has massively reduced because lockdowns across the world in April 2020, due to the Covid-19 pandemic, have kept people inside. As a result, oll firms have had to rent extra space to store the surplus supply. That has forced the price of US oil into negative territory - as low as minus US$37 a barrel. ‘As lockdowns continue, storage space for oil is filing fast on land and at sea. As that is likely to put further downward pressure on prices, there will need to be a strong recovery in demand to really tum the market round. Source: BBC News, 21 April 2020 @UCLES & MOE 2021 & ‘8823/01/01N21Extract 3: Unintended consequences The production and the use of diesel and petrol fuels for vehicles is harmful to the environment. The raw material used to make the fuels — crude oil - has to be extracted by drilling deep underground, causing destruction of local environments and reducing the stock of fossil fuels left in the ground. Also, the use of diesel and petrol fuels in vehicles releases harmful emissions into the atmosphere. ‘One way that governments tried to reduce the use of crude oil was to lower the price of biofuel, a substitute fuel for diesel and petrol, by subsidising its production. Biofuel is made from certain crops grown on farmland instead of being extracted from underground. However, early in the 2010s, problems with this approach became apparent. Recent laws to increase the use of biofuel in cars have had far-flung ripple effects, economists say, as land once devoted to growing food for the people of Guatemala is now more profitably used for vehicle fuel. In a globalised world, the expansion of growing crops for biofuels has contributed to sharp increases in food prices. This is because of a shortage of land for growing food in poor comers of Africa and Latin America as the crops for biofuel are grown wherever it is cheapest. Many worry that Guatemala's poor people are already suffering from the diversion of food to fuel. "There are pros and cons to biofuel, but not here,’ said a spokesperson for Guatemala’s farmers. “These people don’t have enough to eat. They need food. They need land. They can't eat biofuel, and they don't drive cars.’ Source: The New York Times, 5 January 2013 © UCLES & MOE 2021 sea0vonN2t [Turn overExtract 4: he provision of public goods A pure public good has the characteristics of non-rivalry and non-excludability. A healthy natural environment, with clean air, clean water, unspoilt landscapes and rich biodiversity surely meets both criteria, However, the use of oil is a constant threat to a healthy natural environment. Ifoil is not transported and disposed of correctly it can enter rivers, either through being spilled or poured down a drain: in the UK, many drains lead directly to rivers, streams or lakes, so putting oil down a drain can have the same effect as pouring it directly into a river. Oil has consistently been among the UK's top three pollutants. It is harmful to plants and animals and a threat to their habitats. The environment takes a long time to recover from oil damage. It's not just the effect oil has on wildlife; oil contamination can make water unsuitable for irrigation and can make drinking water sources unfit for use. The damage is very expensive to fix. There are various policy options a government could use to reduce the negative effects of cil consumption on the natural environment. Oil could be taxed more heavily, or the sale and production of oil could be regulated more strictly. Or perhaps there is a need for more public education about the harmful effects of oil on the natural environment, so that producers and consumers take them into account when they transport and dispose of oil. Source: oilcare.org.uk, 2015 © UCLES & MOE 2021 82310110N21Questions (a) (i) With reference to Figure 1, summarise the main changes that occurred in the crude oil Price during the period 2014-2018. (3) (ii) Extract 4 states that ‘If indeed demand for crude oil falls and supply rises, price will be bound to respond in the predicted direction.” Using a supply and demand diagram, explain the impact of these changes on the price of crude oil. (4) (b) With reference to Extract 2 and Extract 3, explain the different causes of the changes in the price of oil in the US and the price of food in Guatemala and comment on the significance of the elasticity of demand or supply in these cases. (6) (c) Using one example from Extract 3 and one other example of your choice, explain ‘an unintended consequence’ of an economic decision in each case. 4) (d) With reference to Extract 4: (i) Explain the meanings of both non-rivairy and non-excludability, and comment on the extent to which a healthy natural environment has these characteristics. [6] (li) Discuss whether imposing a tax on oil is the best way to ‘reduce the negative effects of il consumption on the natural environment.” [10] (e) Some people argue that any intervention in markets by government involves so much danger of making the allocation of resources less efficient that non-intervention is the best policy in all circumstances. Discuss the extent to which you agree with this view. (12) (otal: 45] © UCLES & MOE 2021 ‘8230110021 [Turn overQuestion 2: Economic issues in Malaysia Extract 5: Some economic data for Malaysia and for other selected Asian economies Table 1 below shows unemployment, inflation and growth data for Malaysia over the period 2007-2018, and Table 2 shows comparative growth forecasts for selected Asian countries for 2018 and 2019. Unemployment rate is measured as the number of unemployed as a percentage of the total labour force. Inflation rate is measured as the annual percentage rise in the Consumer Price Index (CPI) Economic growth rate is measured as the annual percentage change in real Gross Domestic Product (GDP). Table 1: Unemployment, inflation and economic growth rates in Malaysia, 2007-2018 Table 2: Forecast economic growth rates for selected Asian economies Year | Uremploymentrate| Inflation rat oma elcome ase) tell 2007 32 20 63 | Asia overall 56 | 56 | 2008 3.3 54 48 | Advanced economies: | 2009 37 0.6 ) 1.5 | Japan 1.2 09 | 2010 3.0 17 75 Korea 3.0 | 29 2011 34 32 53 Singapore 29 | 27 | 2012 29 17 55 Developing economies: 2013 33 24 47 China es | 64 2014 29 3.4 60 Indonesia 53 | 55 2015 3.2 24 5.4 Malaysia 53 | 50 2016 35 24 42 Thailand 39 | 38 2017 34 3.8 59 Vietnam 66 65 2018 3.3 1.0 47 © UCLES 8 MOE 2021 Sources: Knoema, World Data Atlas, July 2019 and Regional Economic Outlook, Asia Pacific, IMF, May 2018 8820/0110N217 Extract 6: Prospects for the Malaysian economy The Malaysian Institute of Economic Research (MIER) claimed in November 2017 that the Malaysian macro-economy had been strengthening, with the latest quarterly growth figures, for the third quarter, estimated at 6.2%, and the forecast for the full year at around 5.5% — not many other economies are able to reach such levels of growth. The main sources of the growth were from domestic consumption, private investment and several major state infrastructure projects. It was equally encouraging, the institute argued, that the growth was being achieved with low inflation and low unemployment. Prospects for 2018 were therefore very positive, especially as there were also signs of the global economy improving. Malaysia has clear plans for its development in the medium term and in the long term, as well as improving prospects both for inflows of foreign direct, investment and for enhanced trading relations with many regional economic partners. Perhaps the only possible concerns were that the Malaysian currency (the ringgit) would likely strengthen, with the associated undesirable short-term consequences, and also that some sectors of the economy have not been benefiting from the growth as much as others. Certainly, it has been the construction industry, owners of capital and high income earners who have benefited most, so the government's aitempts to address this issue of inequality in the budget for 2018 are appropriate. The MIER added that, in the long run, it is important that greater social equity is achieved through better education and training, increased productivity, greater social mobility and more productive self-employment, rather than through subsidies and handouts, if careful fiscal management and macroeconomic stability are to be preserved. Source: New Straits Times, 23 November 2017 Extract 7: Performance of the Malaysian economy in 2018 As a result largely of forces outside Malaysia's control, the economy grew by less than forecast during 2018 — the annual rate was under 5%. Negative contributions from net exports were the main factors behind the relatively lower-than-forecast figures for the second and third quarters. Private consumption, investment and government spending continued to increase at a steady pace throughout. Overall, growth for 2018 was recorded as 4.7%, down from 5.9% in 2017. Source: Trading Economics, 2019 euciesamoezat seasons Turn overExtract 8: Inequality in Malaysia Income inequality is an extremely important element of Malaysia's economic position, and a vital issue to be addressed if the country is to continue to achieve significant growth. A recent survey showed that 77% of Malaysians believe that the gap between the rich and the poor in their cou is getting wider and is a big problem. Some relevant data is shown in Figure 2 and Figure 3. Figure 2: Malaysia's Gini coefficient for income, 1970-2014 0.60: — Gini coefficient 0.55: 0.50: 0.45: 0.40: [\ 0.35. 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Year Figure 3: Gini coefficient for income in selected ASEAN countries, 2014 0.484 9.490 | 0.394 932) 0.367 0.360 0.356 0.300 oF re Ss gs & £ ¥ FS FS FSP & V s ee we & © It needs to be said that income inequality is not necessarily a bad thing. It may cause social unrest and there may be serious financial hardship for those at the lower end of the income distribution, though it should be pointed out that only 0.6% of the Malaysian people are deemed to live below the national poverty line — the level of income below which a person’s minimum nutritional, clothing and shelter needs cannot be met. If everyone earned the same amount, however, there would be a serious lack of incentives to drive the increase of productivity which is the main engine of economic growth. There is a compromise to be had between too little and too much inequality in the distribution of income. Source: wwnw.comparehero.my, 31 October 2018 © UCLES & MOE 2021 es2v01/01N21Questions () (0) Explain the meaning of real in the term ‘annual percentage change in real GDP’. [2] (ii) Using Table 1 and Table 2, identify the main features of Malaysia's economic growth Performance, both over time and compared with the other given Asian economies. [4] © [eng ADIAS analysis, explain how variations in consumption could cause variations in he els of unemployment and inflation in Malaysia during the period 2008-2010. [6] (c) Extract 7 states that Malaysia had a lower-than-forecast growth performance in 2018. Explain how supply-side policies could have been used to bring about a greater rate of growth in living standards in Malaysia after the relative slow-down of 2018. 7 (a) Extract 6 suggests that a possible concem arising out of Malaysia's good economic prospects was that the ringgit ‘would likely strengthen’. Discuss how a strengthening of the ringgit might result in ‘undesirable short-term consequences’, with particular reference to the standard of living in Malaysia. (8) (e) Using Figure 2 and Figure 3, comment on the perception in Extract 8 that ‘the gap between the rich and the poor in their country (Malaysia) is getting wider and is a big problem’. [8] (f) Using material about Malaysia in the case to illustrate your answer, discuss the view that more inclusive but slower economic growth is preferable to growth that is at a higher rate but is less inclusive. [10] [Total: 45] ‘©UCLES & MOE 2021 & 8823/01/0N24