Economics 9708/21 — October/November 2015
Cambridge AS Level · AS Level Data Response and Essays · worked solutions for every part, with the mark scheme
Topics Price Stability · Demand and Supply · Elasticities of Demand · Market Equilibrium and the Price Mechanism · Methods of Government Intervention in Markets · Scarcity, Choice and Opportunity Cost · +5 more
Increased cereal supplies push down prices and boost world trade
The Food and Agriculture Organisation’s (FAO) forecast for world cereal production in 2013 has been adjusted upward by 8.5%, a record level of output. Early prospects for crops to be harvested in 2014 are also favourable. Overall prospects for wheat production in the northern hemisphere remain good. In the southern hemisphere, maize output is likely to rise in Brazil and Argentina. The prospects for the 2014 rice crop are mixed, with Brazil expanding output, while in the rest of South America, insufficient rainfall is limiting the supply of rice. The lack of water for irrigation is also limiting rice output in Australia and Sri Lanka.
FAO’s forecast for world consumption of cereals in 2013 is forecast to rise by 1.7 %. This is slightly larger than the predicted population growth. Other uses of cereals, apart from food and animal feed, are expected to show a strong growth in 2013/14.
Source: adapted from Food and Agriculture Organisation
Table 1: selected FAO food price indices
(Base year 2002–2004 (average of prices) = 100)
| The Total Food Price Index (meat, cereals, dairy, vegetable oils & sugar) | Cereals Price Index (includes wheat, rice & maize) | Dairy Product Price Index | |
|---|---|---|---|
| 2011 | 229.9 | 240.9 | 229.5 |
| 2012 | 213.3 | 236.1 | 193.6 |
| 2013 | 209.8 | 219.2 | 242.7 |
| 2014 January | 203.4 | 188.4 | 267.7 |
Source: adapted from Food and Agriculture Organisation
India grain subsidy may only cause hunger elsewhere
India’s battle against hunger might cause problems for the world’s poorest. The Indian Government has said that 67 % of India’s population, over 800 million people, will have the right to buy up to 5 kilogrammes (kg) of rice, wheat and other cereals from the state each month at subsidised prices. This substantial food subsidy will worsen public finances. The total food subsidy expenditure is estimated to be US$25 billion.
When the production of rice in India is insufficient, the subsidy may destabilise the global rice market. India will be forced to import rice, which will lead to higher prices and rice shortages in other importing countries such as Nigeria, Bangladesh, Indonesia and the Philippines. India’s good intentions may just push its rice shortages on to the rest of the world.
Source: adapted from Reuters Breakingviews 2013
Calculate the percentage change in the price of cereals between 2011 and January 2014.
Explain two possible reasons why the world price of cereals and the world price of dairy products moved in opposite directions between 2012 and January 2014.
Explain how an economist would decide whether cereals and dairy products are substitutes.
Use a diagram to illustrate how a subsidy will affect the price and quantity of rice produced in India.
Explain a likely opportunity cost of the Indian Government’s spending on the food subsidy.
Discuss whether food subsidies are likely to solve the world’s food shortages in the long run.
The rest of this paper
3 more questions- Q2Elasticities of Demand · Demand and Supply20M
- Q3Exchange Rates · Price Stability · Balance of Payments20M
- Q4International Trade and Comparative Advantage · Protectionism20M