Define the term tariffs indicated in bold in the text (paragraph [5]).

State two functions of the World Trade Organization (WTO) (paragraph [6]).

Using a demand and supply diagram for processed food, explain how the EU’s tariff on palm oil might impact the market for processed food in the EU (paragraph [5]).

Using a production possibilities curve (PPC) diagram to illustrate comparative advantage, explain why the EU would export cars to Indonesia and Indonesia would export clothing to the EU (paragraph [2]).

Using information from the text/data and your knowledge of economics, discuss the economic effects on Indonesia of establishing a free trade agreement with the EU.

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

For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.

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

The x and y axes can be cars and clothing.

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.

Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Answers may include:

• definition of free trade agreement.

Economic models/theory may include:

• AD/AS diagram
• economies of scale diagram
• PPC
• market failure
• trade creation / trade diversion.

Positive economic effects may include:

• Larger market, increased output, leads to economies of scale (paragraph [3]).
• More exports increases aggregate demand which increases real GDP, which may help the unemployment rate of 12 % (paragraph [2]).
• Increased FDI, increases AD, increases real GDP (paragraph [1]).
• The EU wants to help Indonesia and has offered grants (17 million) help improve trade conditions and capacity, this could lead to improved quality and quantity of resources (paragraph [8]).
• Relationship could help with development of legal and sustainable palm oil production, decreasing market failure (paragraph [8]), allow for long term growth and development.
• To be competitive, as other main competitors already have an agreement (paragraph [3]). Indonesia may risk losing export customers if they do not establish an FTA.
• Comparative advantage gains (paragraph [2]), better allocation of resources.
• Buffers problems with trade war between US and China (paragraph [3]).
• Already the two countries appear to be engaging in the trade war. An agreement might help with relations.
• To avoid trade protection (paragraph [1]).
• Trade creation.
• Lower prices, more variety for Indonesian consumers.
• Allows Indonesia to get foreign exchange.
• Access better/cheaper technology.

Negative economic effects may include:

• The trade might be restricted by the EU’s stance on biofuel from palm oil (paragraph [5]). This may restrict benefits from the trade agreement as it is a large part of Indonesia’s economy.
• The areas of predicted growth from the agreement are industries that face low wages and poor working conditions, this may be further exploited (paragraph [2]).
• FDI associated problems (paragraph [1]).
• Could be a problematic negotiation (time consuming and costly), considering the trade war that appears to be occurring with the countries (paragraph [5] and [6]).
• Trade diversion.
• Infant industry argument.

Any reasonable discussion.

This was generally well answered.

Students often lost marks by confusing the functions of WTO with its aims and objectives. A list of the functions of the WTO and other such organisations are easily accessible and students should be encouraged to search for these.

Well prepared students had little difficulty with this question, recognising that palm oil was a factor of production in processed foods and that a tariff would result in an increase in the costs of production. They then went on to construct a well labelled diagram, illustrating the effect of the tariff on the price and output of processed food in the EU. The main limitation was that some students failed to recognise the fact that palm oil was a factor of production.

There were, however, a significant number of students who misread the question and based their answer on a tariff diagram while others used a supply and demand diagram related to palm oil and not processed food. Using such diagrams and using them as the basis for their explanation made it very difficult to access marks.

As with part (b), well prepared candidates had little difficulty with this question. It is comforting to note the accuracy and appropriateness of the diagram used and that it was clearly understood. There was in general a good understanding of the concept of comparative advantage although there were occasions when there was confusion with absolute advantage. In the explanation, the essential idea that there must be different opportunity costs for there to be a comparative advantage was sometimes not fully explained.

Overall this was disappointingly answered. Most students had some idea of a free trade area but relatively few were able to analyse the effects on Indonesia in joining such an area. There were, however, exceptions where students demonstrated not only a clear understanding of a free trade area in general but were able to apply its impact on the Indonesian economy using a wide range of economic concepts/theory such as trade creation/diversion, economies of scale and AD/AS analysis etc. Such answers were all too rare.

A significant number focused on the economic effects on the Indonesian economy and the EU (not asked for) while some only on the EU (which made these answers irrelevant). Many responses lacked analytical depth and others misused or misread the data in the extract. Many failed to recognise (from the extract) that the EU was phasing out their use of biodiesel by 2030 and based their answer on the expansion of palm oil production.