(2016) A Level H2 Econs CSQ 1 by Suggested Answers Mr Eugene Toh (A Level Economics Tutor)

(2016) A Level H2 Econs Paper 1 CSQ Q1

a.     India’s imports of agricultural products generally increased, from US$4 billion in 2005 to US$19 billion in 2013.

Comments: To get imports, take total exports minus net exports

b.     In Figure 2, we can see that both exports and stocks for wheat and rice increased but the extent of the increase for stocks was far greater than the increase for exports. We can illustrate this through a price floor diagram, which guarantees a price at Pf, where the increase in output is from from Q to Q2, but the surplus generated is greater from Q1 to Q2 (refer to diagram below)

c.     i.

1.     Export prices could have increased while import prices could have decreased or remain constant, leading to an improvement in the TOT OR

2.     Export prices and import prices could have both decreased, but the decrease in import prices was greater than the decrease in export prices, leading to an improvement in the TOT

ii.              A rise in TOT could suggest that the prices of agricultural exports could have been rising. If we assume demand for agricultural exports to be price inelastic, then, an increase in the prices would lead to a less than proportionate fall in quantity demanded, leading to an increase in agricultural export revenue.

At the same time, a rise in TOT could suggest that prices of agricultural imports were falling, if this is so, supposedly, this should lead to a less than proportionate increase in quantity demanded for imports (demand again being price inelastic), leading to a fall in import expenditure. Thus, a rise in TOT can be consistent with a strong rise in in net exports.

d.     The concept of CA would to some extent explain that India should specialize in agricultural good

1.     Explain briefly theory of CA means countries should specialize and export what it has a CA in (incurs a lower opportunity cost in production) and import what it doesn’t have a CA in)

2.     That India should in theory have a CA in agricultural goods considering that

a.     It has abundance of labour resources and

b.     An abundance of land resources

3.     It in theory should have a low opportunity cost in producing agricultural goods

4.     However, the presence of significant government subsidies may cause some distortions in the market mechanism.

5.     India may be inefficiently specializing in certain types of agricultural goods (those with government support) over certain types of agricultural goods (those without government support)

6.     Arguably, the presence of these government subsidies may also mean that India may have some CA in other areas that they could be specializing in, but are not doing so due to the significant incentives available for agricultural goods

e.     India’s policy towards agricultural goods can be supported on two key justifications

1.     As a retaliatory policy towards wealthy nations like United States and European Union whom have provided unfair agricultural subsidies that could provide unfair advantages to their agricultural goods as opposed to those produced by India.

2.     As a income support policy for Indian farmers to reduce the problem of income inequality

However, negative repercussions could occur

1.     Further retaliatory action could arise from these subsidies (India recently extended its subsidy scheme to sugar, and other countries could follow) and this could render its actions ineffective

2.     Huge surpluses are created, where the government has to pick up the tab. Not only do these create wastages (as pointed out in the extract), corruption, but there is also a huge tax bill that taxpayers will have to bear

 

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2016, H2, CSQEUGENE TOH