Calculate the social surplus at the equilibrium market price.

The government in Alpha imposes a price ceiling of $5 per kilogram.

Calculate the resulting shortage in the market.

The government in Alpha imposes a price ceiling of $5 per kilogram.

Calculate the change in the consumer surplus after the imposition of the price ceiling.

The government in Alpha imposes a price ceiling of $5 per kilogram.

Calculate the welfare loss after the imposition of the price ceiling.

A new government in Alpha decides to abolish the price ceiling. Instead, it opens the rice market to imports. The world supply of rice is perfectly elastic; any quantity can be bought for $3 per kilogram.

Using the diagram, calculate the import expenditures on rice.

Define the term comparative advantage.

Explain two limitations of the theory of comparative advantage.

Alpha’s government decides to impose a $2 tariff on each kilogram of imported rice. Using the diagram, calculate the government revenue that results from the imposition of the tariff.

Using the data in Table 1, calculate Alpha’s current account balance for 2016.

Outline how Alpha’s current account balance for 2016 is likely to affect the exchange rate of its currency.

State one way in which the government of Alpha might bring about a depreciation of its currency.

Following the depreciation, it is observed that the current account balance worsens initially, but improves after a certain period of time. Explain why this might be expected to happen.

0.5 X 8000 (14 – 2) [1]

Any valid working is sufficient for [1].

$48 000 [1]

An answer of $48 000 or 48 000 without any working is sufficient for [1].

3000 kg

(0.5 X 12 X 6000) – (0.5 X 8 X 8000) [1]

Any valid working is sufficient for [1].

= $4000 [1]

An answer of $4000 or 4000 without any workings is sufficient for [1].

NB if a candidate has calculated the initial consumer surplus in part (a) as part of the social surplus (and workings are seen for this) the “valid working” mark may still be awarded.

0.5 X 2000 X 3 [1]

Any valid working is sufficient for [1].

= $3000 [1]

An answer of $3000 or 3000 without any working is sufficient [1].

3 X (11 000 – 2000) [1]

Any valid working is sufficient for [1].

= $27 000 [1]

An answer of $27 000 or 27 000 without any working is sufficient for [1].

Level
0 The work does not meet a standard described by the descriptors below. [0]

1 Vague definition. [1]

The idea that one country can produce more efficiently than another country.

2 Accurate definition. [2]

An explanation that it is when a country can produce a product at a lower opportunity cost than another country.

Level
0 The work does not meet a standard described by the descriptors below. [0]

1 The written response is limited. [1-2]

For a limited explanation of one limitation [1].
For an accurate explanation of only one or a limited explanation of two limitations [2].

2 The written response is accurate. [3-4]

For accurately explaining any two of the following limitations:

• why the assumptions of the theory may not hold in the real world eg constant opportunity costs, zero transport costs, perfect competition, no trade barriers, free movement of factors of production within the country, homogeneous products (inability of the model in explaining intra-industry trade), the static nature of the theory – ignoring changes in technology. (If two of these are explained, full marks may be awarded.)
• why application of comparative advantage may not bring about the benefits inherent in the theory eg structural unemployment, infant industry argument, over-specialization (on primary products), over-reliance on trading partners (the strategic argument). (If two of these are explained, full marks may be awarded.)
• any other reasonable limitation explained. However, the argument that “it assumes only 2 countries/products” should not be accepted as the theory of comparative advantage is a model which can be generalized.

For providing an accurate explanation of one limitation and a limited explanation of another [3].

For providing accurate explanations of two limitations [4].

2 (9000 – 6000) = $6000

(852 – 829 + 409 – 435) +144 – 170 [1]

Any valid working is sufficient for [1].

Valid working must include (852 – 829 + 409 – 435), and may include +144 or –170 but neither –288 or 361 (as these are not current account items).

= –$29 million [1]

Level

0 The work does not reach a standard described by the descriptors below. [0]

1 Vague outline. [1]

For the idea that a deficit will cause the exchange rate to fall.

2 Accurate outline. [2]

For outlining that a current account deficit implies that the supply of the currency exceeds the demand for the currency causing the exchange rate to depreciate
OR demand for currency shifts (has decreased) left OR supply of currency shifts (has increased) right, (or, both) either of which causes a depreciation.

OFR applies if a current account surplus has been calculated in part (f)(i).

The central bank may:

• sell the currency (in the foreign exchange market)
• reduce interest rates/increase the money supply
• add to its reserves of foreign currency.

Level
0 The work does not meet a standard described by the descriptors below. [0]

1 The written response is limited. [1-2]

For the idea that a depreciation makes exports cheaper (and imports more expensive) leading to increased net exports and thus causing an improvement in the current account balance.

2 The written response is accurate. [3-4]

For an explanation that the effect of a depreciation, which makes exports cheaper (and imports more expensive) depends on the price elasticities of demand for exports and imports; short-term elasticities are relatively low and therefore the current account balance may worsen; only in the long term, when the Marshall-Lerner condition is satisfied, namely that the sum of these elasticities must exceed unity, will it improve.

NB It is not necessary to refer explicitly to the Marshall-Lerner condition or the J-curve effect.