Raffles Institution (Junior College) JC2 Preliminary Examination 2009 ECONOMICS

Higher 1 Paper 1 18 September 2009 3 hours

Additional Materials: Answer Paper

8819/01

READ THESE INSTRUCTIONS FIRST Write your name, index number and CT class 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 diagrams, graphs or rough working. Do not use paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question from a choice of 2 questions. Answer each question on a fresh sheet of paper. At the end of the examination, fasten all your work securely together with this sheet as cover page for your answer script. The number of marks is given in brackets [ ] at the end of each part question.

Section
Name: __________________________ Civics Class: _____________________ _____________________ Economics Tutor: _________________

Question 1

Marks /30 /30 /25

A 2 B
(please fill in question no.)

This document consists of 7 printed pages and 1 blank page.

RI (JC) 2009

8819/01/Prelim/JC2/09

[Turn over

BLANK PAGE

RI (JC) 2009

8819/01/Prelim/JC2/09

3 Section A Answer all questions in this section. Question 1 Extract 1: Cost of Treating Obesity Soars The medical costs of treating obesity-related diseases may have soared as high as $147 billion in 2008, the Centers for Disease Control and Prevention said Monday, as its new director set a fresh tone in favor of more aggressively attacking obesity. The cost of treating obesity doubled over a decade, signaling the rising prevalence of excess weight and the toll it is taking on the health-care system. The medical costs of obesity were estimated to be $74 billion in 1998, according to a study by federal government researchers and RTI International, a nonprofit research institute in Research Triangle Park, N.C. The findings were released at a conference on obesity held by the CDC in Washington, D.C. The prevalence of obesity rose 37% between 1998 and 2006, and medical costs climbed to about 9.1% of all U.S. medical costs, the researchers said. Obese people spent 42% more than people of normal weight on medical costs in 2006, a difference of $1,429, the study found. Prescription drugs accounted for much of the increase. The numbers underscore the urgent need for deeper interventions in society and the environment that will make it easier for people to maintain normal weight, Thomas Frieden, the CDCs new director, told conference attendees. Obesity is causing disabilities and exacerbating health disparities, he said. The average American consumes about 250 calories more a day now than two or three decades ago. In his speech Monday, Dr. Friedenwho became CDC director in Junesaid measures that had worked to control tobacco, such as taxes and reducing exposure, could help control obesity, too. Those could include a tax on sugar-sweetened beverages. A 10% price increase on sugared beverages could reduce consumption 7.8%, he said. Source: The Wall Street Journal, 28 July 2009 Extract 2: A High Price for Healthy Food Healthy eating really does cost more. Thats what University of Washington researchers found when they compared the prices of 370 foods sold at supermarkets in the Seattle area. Calorie for calorie, junk foods not only cost less than fruits and vegetables, but junk food prices also are less likely to rise as a result of inflation. The findings, reported in the current issue of the Journal of the American Dietetic Association, may help explain why the highest rates of obesity are seen among people in lower-income groups. The scientists took an unusual approach, essentially comparing the price of a calorie in a junk food to one consumed in a healthier meal. Although fruits and vegetables are rich in nutrients, they also contain relatively few calories. Foods with high energy density, meaning they pack the most calories per gram, included candy, pastries, baked goods and snacks.

RI (JC) 2009

8819/01/Prelim/JC2/09

[Turn over

Figure 1: Change in annual food prices

Change in annual food prices

Source: Bureau of Labor Statistics via Hover Figure 2: Percentage of children who are obese

Source: National Center for Health Statistics (2006) Although people dont knowingly shop for calories per se, the data show that its easier for low-income people to sustain themselves on junk food rather than fruits and vegetables, says the studys lead author Adam Drewnowski, director of the center for public health nutrition at the University of Washington. But its easier to overeat junk food, Dr. Drewnowski adds, both because it tastes good and because eaters often must consume a greater volume in order to feel satisfied. Still, even those who consume twice as much in junk food calories are still spending far less than healthy eaters. Source: The New York Times, 5 December 2007

RI (JC) 2009

8819/01/Prelim/JC2/09

5 Extract 3: Fat Tax could save 3,200 lives each year A "fat tax" on salty, sugary and fatty foods could save thousands of lives each year, according to a study published on Thursday. Researchers at Oxford University say that charging Value Added Tax (VAT) at 17.5 percent on foods deemed to be unhealthy would cut consumer demand and reduce the number of heart attacks and strokes. The purchase tax is already levied on a small number of products such as potato crisps, ice cream, confectionery and chocolate biscuits, but most food is exempt. The move could save an estimated 3,200 lives in Britain each year, according to the study in the Journal of Epidemiology and Community Health. "A well-designed and carefully-targeted fat tax could be a useful tool for reducing the burden of food-related disease," the study concluded. The team from Oxford's Department of Public Health said higher taxes have already been imposed on cigarettes and alcohol to encourage healthy living. Source: Reuters, 12 July 2007

Questions (a) (i) Describe the trend in obesity among children and youth for the period 1971 to 2004. [2] (ii) Explain two possible reasons for the trend in obesity among children and youth? [3]

(b) (i) Compare the changes in the price of healthy food (fresh fruits and vegetables) and changes in the price of junk food (beer, butter and sodas) from 1980 to 2009. [2] (ii) Account for the trends identified in (b) (i). [3]

(c) Define price elasticity of demand and calculate the price elasticity of demand for sugared beverages. [2] (d) (i) Explain why junk food is a source of market failure. [8]

(ii) To what extent is a fat tax the most effective measure in correcting this market failure? [10] [30 marks]

RI (JC) 2009

8819/01/Prelim/JC2/09

[Turn over

6 Question 2 Extract 4: China and global inflation For a number of years, cheap Chinese goods helped to reduce prices in rich economies, but more recently wages and prices have surged in China. On top of this, it is believed that Chinas huge demand for food and energy is pushing up global commodity prices. As a result, it is claimed, China is no longer exporting deflation to the rich world, but inflation. In America, prices of goods in Wal-Mart, where many Americans shop, have risen. Figure 3: US import prices (2005-2008)

Source: The Economist estimates However, the pace of growth in Chinas oil demand slowed to 4% last year. And Chinas food production has grown faster than consumption over the past few years. As a small, but growing, net exporter of wheat, maize and rice, China has, if anything, helped to ease world grain prices. Perhaps the best way to determine Chinas impact on world inflation is to gauge whether its net impact is to increase aggregate global demand or supply. The integration of China and other emerging economies into the world trading system has, in effect, more than doubled the global labour force, and by curbing workers bargaining power it has restrained pay demands in most developed economies in recent years. Source: The Economist, 14 August 2008 Extract 5: China slows down after years of boom After years of boom, China's GDP growth has now slowed for the last five consecutive quarters. The IMF forecasted that the Chinese GDP will decline from 12% last year to about 9.6% this year. One of the most worrying aspects for the Chinese leadership is that net exports contributed only 1.2 percentage points to the country's total GDP growth over the last nine months, down from 2.4 percentage points over the same period of 2007. Since President Hu Jintao took charge in 2004 with a mission to correct the imbalances that have accumulated throughout China's economy since the market reform process began in

RI (JC) 2009

8819/01/Prelim/JC2/09

7 1978, senior leaders have talked about boosting domestic consumption by raising incomes and improving social services, but growth has remained thoroughly export-led. Already forced to yield to international pressure to revalue its currency and make its goods more expensive overseas, China is now facing a significant slump in demand as the recession hits its markets in Europe and America. Li Xiaochao of China's National Bureau of Statistics said that a range of measures - including export tax relief - will be introduced in the next few months to ease the pain. The Beijing leadership has also vowed to spend more on welfare and construction, such as rebuilding the areas devastated by the earthquake in Sichuan. Source: The Guardian, 21 October 2008 Extract 6: China to contest WTO ruling China is to appeal against a World Trade Organization (WTO) ruling that calls for it to end restrictions on the import of US film and music products. Its move comes a week after the WTO said China's policy of allowing the goods to be imported only by state-run firms broke global trade rules. The WTO wants private Chinese firms to be able to import US DVDs, CDs, computer games and films, etc. making it easier for US entertainment companies to access the Chinese marketplace. China's current limitations on US entertainment imports have created a large domestic counterfeit industry, much to US annoyance. The case is just the latest in a series of trade disputes between China and the US. While Washington has long accused China of trade protectionism, the US is also unhappy at the high volume of Chinese exports to America, accusing Beijing of deliberately keeping the yuan undervalued to make its exports artificially cheap. President Barack Obama has until 17 September to decide whether to restrict the import of Chinese car and light truck tyres. The US trade deficit with China totalled $103bn in the first half of 2009, down 13% from the same period last year. Source: BBC News, 17 August 2009

Questions (a) (i) Compare the change in US import prices from China in US dollar and in Chinese yuan for 2008. [2] (ii) Using figure 3, explain two factors that may have caused the rise in prices of goods in Wal-Mart. [4] (b) With an appropriate diagram, assess whether the claim that China is no longer exporting deflation to the rich world, but inflation is justified. [6] (c) Identify the macroeconomic problem that China is facing and discuss the measures the Chinese government can take to deal with it. [8] (d) Discuss whether President Obama should restrict the import of Chinese cars and light truck tyres. [10] [30 marks]

RI (JC) 2009

8819/01/Prelim/JC2/09

[Turn over

8 Section B Answer one question from this section. 3. 26% of Singapores government expenditure is allocated to the Ministry of Defence for national defence. 9% of the government expenditure is allocated to the Ministry of Health to ensure good and affordable healthcare for Singaporeans. (a) Explain the economic rationale for governments to provide national defence. [10]

(b) Discuss the view that the government should subsidise all forms of healthcare for Singaporeans due to positive externalities. [15]

4. The Economic Development Board of Singapore is a one-stop agency which facilitates foreign firms seeking to invest in manufacturing and services sectors. It managed to attract a record S$18 billion of foreign direct investments in 2008. (a) Explain the key macroeconomic objectives of the Singapore government. [10]

(b) Discuss the extent to which an increase in Foreign Direct Investment will achieve the above objectives. [15]

Copyright Acknowledgements: Extract 1 Figure 1 Figure 2 Extract 2 Extract 3 Figure 3 Extract 4 Extract 5 Extract 6 The Wall Street Journal, 28 July 2009 Bureau of Labor Statistics via Hover National Center for Health Statistics (2006) The New York Times, 5 December 2007 Reuters, 12 July 2007 The Economist Estimates The Economist, 14 August 2008 The Guardian, 21 October 2008 BBC News, 17 August 2009

RI (JC) 2009

8819/01/Prelim/JC2/09