State two functions of the World Trade Organization (WTO) (paragraph [1]).

Define the term free trade indicated in bold in the text (paragraph [1]).

Using an AD/AS diagram, explain how removing “the import quota will reduce the inflation rate in the Philippines” (paragraph [5]).

Using a perfect competition diagram, explain whether farmers in the Philippines are making an economic profit or loss (Table 1).

Using information from the text/data and your knowledge of economics, evaluate the impact on the economy in the Philippines of removing the rice quota.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

For AD/AS the vertical axis may be average (general) price level, APL or price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

NB Candidates must state the values in either the diagram or the explanation for full marks.

NB Some candidates may refer to the Vietnamese price of PH₱9.64 shown in Table 1. This is also acceptable as it must be assumed that these candidates consider that, once the quota is removed, the price in the Philippines will fall to the Vietnamese level. Both PH₱12.19 and PH₱9.64 should be accepted as valid prices.

For a perfectly competitive diagram, the vertical axis may be labelled Cost (C), Price (P) or Revenue (R). The horizontal axis may be labelled Quantity (Q) or Output. A title is not necessary. AC or ATC can be used.

NB MC curve is not required for full marks.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the information provided.

“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.

Economic Analysis may include:

• trade protection
• theory of comparative advantage / allocation of resources
• AD /AS
• employment
• inflation
• standard of living
• economies of scale.

Positive impacts may include: 

• attempts at self-sufficiency of production improved by eliminating quotas (paragraph [1]) and providing assistance to farmers (paragraph [4])
• rice is a staple food so less volatility in rice prices when quota removed – helps households (paragraph [2])
• lowers rice price for households – significant annual savings (paragraph [3])
• lower rice price has forward linkage effect reducing input costs for food manufacturers (paragraph [5])
• more competition from Vietnamese rice imports encourages domestic producer efficiency and innovation (paragraph [3])
• more efficient allocation of resources if farmers “move to producing other crops” – comparative advantage (paragraph [3])
• opportunity to achieve economies of scale in the long run by bringing “down the cost of production” (technical economies through mechanization and possibility of farm consolidations) (paragraph [3])
• lower rice prices reduce input costs and increase SRAS therefore relieving cost-push inflation (paragraph [5]).

Negative impacts may include:

• goal of self-sufficiency in rice could be compromised in the long run if the number of rice farmers is reduced (paragraph [1])
• rice is a staple food so maintaining rice production is a matter of national security (paragraph [1]) 
• rice farmers are already making a loss so removing quotas will increase losses and cause some farmers to leave the rice market in the long run (Table 1)
• likely to be unemployment in the sector as rice farmers leave the market (paragraph [3] and Table 1) 
• local unemployment can lead to hollowing out of rural communities as unemployed migrate to urban areas
• government revenue allocated to support programs to help rice farmers adjust carries significant opportunity costs (paragraph [4])
• ATC in the Philippines is almost double that in Vietnam, so it might take a long time for Filipino farmers to become competitive (Table 1).

Any reasonable evaluation.

Overall not well answered. Too many students confused the WTO with other organizations such as the IMF or World Bank. Some candidates tended to highlight the aims of the WTO rather than its functions.  

On what should be a straightforward definition, a surprising number of answers lacked precision, e.g. "Free trade is trade without restrictions". Candidates should be reminded that definitions need to be precise and that vague answers will attract 1 mark at best.

While the question specifically asked for an an AD/AS diagram, a significant minority of students offered up a quota diagram. 

Two different approaches (decrease of AS or decrease in AD) were offered by candidates with a variety of reasons for each shift.

Some lower-achieving responses lost one mark for not relating the decrease in AS with the increase in the cost of production. Good responses had little difficulty in explaining, using the diagram, that removing the import quota would likely increase the supply of rice, reducing its price thus lowering input costs, a significant component in calculating the CPI/inflation rate.

Some candidates took the alternative route and explained the impact on inflation in terms of an increase in the value of imports resulting from the removal of the quota on rice and how this would decrease X-M, resulting in a fall in AD with a consequent impact on inflation.

This was generally well answered. Overall there was evidence of a sound understanding of the perfect competition model and a testament to good teaching of this element of the syllabus. Some potentially good answers were marred by a failure to use the data provided either on the diagram or in the explanation. This inevitably resulted in a loss of 1 mark. Some constructed a perfect competition diagram but failed to indicate a loss.

As with most part (d) questions, there was a general lack of depth of analysis and effective evaluation with a disappointing number of students managing to achieve a Level 3 quality of answer. The higher­-achieving answers focused on the macroeconomic impact of the removal of the quota, i.e. impact on inflation, employment (focusing on specific sectors) and economic growth. Some students highlighted the impact on the balance of payments. Lower-achieving responses spent too much time explaining the effect of a quota rather than the impact of its removal. Such an approach attracted few marks and wasted valuable time that would have been better spent on the more salient aspects of the question. Candidates should be encouraged to only focus on the question being asked rather than the one they would like to have been asked. In addition, little effective use was made of the information in the extract, with too many students simply repeating the points made in the text without much analysis or evaluation.