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Question 1: Tackling Diabetes

Figure 1: World price of rice

* A hundredweight, Cwt, is a unit of measurement for weight used in certain commodities

Source: www.tradingeconomics.com, accessed 15.07.18 Extract 1: Global food prices drop to a five year low

Factors that are driving the sharp decline in international food prices include cheap oil that contributed to abundant global supplies of food in 2014, as well as prospects of a bumper crop for wheat, maize and rice in 2015. The agriculture and food sector continue to benefit from cheaper chemical fertilizer, lower fuel and transportation costs brought on by the previous year’s oil price declines.

Between August 2014 and May 2015, wheat prices plunged by 18%, rice prices dropped by 14% and maize prices declined by 6%. However, the arrival of El Nino, the appreciation of the U.S. dollar and the recent increase in oil prices could drive up food prices in the coming months.

Adapted from The World Bank, 1 July 2015

Extract 2: Challenges of the global rice market As rice is one of the staple grains for a large number of the world’s population and to ensure food security, reduce poverty and help traditional farmers adapt to the effects of climate changes, profitable rice cultures must survive on less land, with less water and with less labour. Thus, the rice production system must be more efficient, environmental-friendly and more equitable. Rice yield per stalk of plant has fallen as a result of the decline in investments made in productivity research since the early 1990s. On the other hand, the areas used for rice cultivation in some of the biggest rice producing countries in the world have been decreasing greatly because the land was re-purposed for other needs, such as urban expansion as well as biofuel production. Also, water resources have become scarcer, and water is vital for traditional rice cultivation methods. In addition, labour hands are more difficult to find because young farmers are more interested in finding jobs in other industry sectors that are better paid. The challenges that the rice industry has to face are complex, and involve the creation of sustainable strategies that will primarily enable the production needed to cater to the growing demand for rice due

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to rapid population growth, especially in the areas where traditional cultivation technologies are intensively used. Such strategies should also ensure profitable productions to keep rice prices at an affordable level for a growing consumer market.

Adapted from AgronoMag, 2 October 2017

Extract 3: Curbing diabetes in Indonesia Diabetes, along with other non-communicable diseases (NCDs), is the leading cause of death in Southeast Asia. As a developing country, Indonesia is facing a double burden of diseases. In 2014, approximately 71 percent of deaths were attributed to NCDs and 6 percent of the total were due to diabetes. Yet, most of the population is still not aware of the urgency of combatting this disease.

There are 2 key reasons for the lack of urgency. Firstly, people still strongly believe that diabetes is a genetic disease; hence, they embrace the diagnosis as part of inevitable heritage from their ancestors. Secondly, it is because we live in what public health experts call an obesogenic environment — an environment that promotes gaining weight and one that is not conducive to weight loss. Jakarta is a perfect example. We have all gone through the phase of making life goals to work out more and eat healthily. But many of us have failed. Staying outdoors is out of the question due to severe pollution, and sidewalks are crowded with vendors and using private vehicle is much more comfortable than sharing public transportation. These aspects beyond our personal choice that directly — or indirectly — affect our population’s health are called social determinants of health.

In response to the growing problem of obesity and diabetes, the government said that it will be making efforts to reduce dependency on rice by promoting other sources of carbohydrates. Although Indonesia is the world’s third-largest rice producer, the country usually needs to import rice from Vietnam or Thailand to maintain stable prices and meet a huge rice demand at home. “This food diversification program is part of our effort to reduce people’s dependency on rice,” said Agung Hendriadi, head of the Agriculture Ministry’s Food Sovereignty Agency. Among the alternative local foods promoted by the government are yam, arrowroot, cassava, corn and sago. According to data by the Agricultural Ministry, Indonesia’s rice consumption per capita is estimated at 124 kilograms this year, which is considerably higher than Malaysia (80 kg), Thailand (70 kg), Japan (50 kg) and South Korea (40 kg).

Adapted from Indonesia Expat, 26 October 2017 Extract 4: Mexico's sugar tax Mexico has high rates of obesity – more than 70% of the population is overweight or obese – and sugar consumption. More than 70% of the added sugar in the diet comes from sugar-sweetened drinks. Coca-Cola is particularly popular and holds a place in the national culture. Mexico’s sugar tax appears to be having a significant impact for the second year running in changing the habits of a nation famous for its love of Coca-Cola, and will encourage countries troubled by obesity and contemplating a tax of their own. An analysis of sugary-drink purchases, carried out by academics in Mexico and the United States, has found that the 5.5% drop in the first year after the tax was introduced was followed by a 9.7% decline in the second year, averaging 7.6% over the two-year period. The tax, which is just 1 peso (4p) per litre of sugary drink, had its biggest impact on the poorest households, where the decline in purchases was 18.8ml per person per day in 2014 and 29.3ml in 2015. Health experts worldwide have been watching the progress of the Mexican tax closely because it could potentially lower the rates of obesity-related diseases and type 2 diabetes in a country with a population of more than 122 million. The Euromonitor International suggested that the Mexican tax may be too low to have the desired effect and that a higher tax introduced in Berkeley, California, has been a bigger success.

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The taxes are a headache for US drinks manufacturers such as Coca-Cola and Pepsi that are struggling to diversify their businesses into healthier foods and drinks as they face declining consumption of their core products. The US beverage industry has lobbied heavily against the taxes, saying it would hurt jobs and that sugar taxes do not work.

Adapted from The Guardian, 22 February 2017

Questions (a) (i) With reference to Figure 1, summarise how the world price of rice changed from

2011 to 2016.

[2] (ii) Using a demand and supply diagram, explain two possible reasons for your

observation.

[4] (b) Extract 2 states that there was a re-purposing of land. Identify the choices

available and the opportunity cost of such a decision.

[2] (c) Explain how a rise in the productivity levels of rice farming may affect resource

allocation in the market for crops used to produce biofuels. [4]

(d) (i) With reference to Extract 3 and using an appropriate diagram, explain why the

market for rice fails. [5]

(ii) Explain how the Indonesian government’s food diversification programme

mentioned in Extract 3 may impact the economy, and comment on the likely impact on its standard of living.

[7]

(e) Analyse how Mexico’s sugar tax would harm the US drinks manufacturers and

employees, and discuss briefly whether it is inevitable that the US drinks manufacturers will be adversely affected.

[9]

(f) Using evidence from the case study and/or your own knowledge, discuss whether

the best course for Indonesia is to follow Mexico’s policy of taxation in its push to discourage Indonesians from consuming rice.

[12]

[Total: 45]

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Answer all questions.

Question 1

Living and Studying in the United States (US)

Figure 1: Changes in the Prices of Selected Goods and Services in the US

Note: College refers to university in the US

Source: Statista, accessed July 2018 Extract 1: Rising rents make housing unaffordable California's high housing costs have pushed many tenants to the edge of affordability. Even if they have steady work, the cost of putting a roof over their heads demands a staggering share of income. One reason rents have risen steadily in California is a lack of apartment construction relative to job and population growth. Those who are less well-off have to make tough decisions: move to a cheaper area or cut back on cellphone services, restaurant outings and other basic necessities.

Source: Los Angeles Times, December 2017 Extract 2: Rent control does more harm than good California voters will decide in November whether to give cities new freedom to expand the use of rent control (a maximum price on rental units). The rent control battle comes as California continues to face a housing affordability crisis. Six of the nation’s 11 most expensive rental markets are in the state, and rents have increased by 40% in the last three years. These prices affect low-income residents the most: 1.7 million California families pay more than half their income on rent. Rent control, tenants’ groups thus argue, is necessary to insulate people from price hikes and allow them to stay in their neighborhoods. But rent control is not without its woes, causing housing shortages that reduce the number of low-income people who can live in a city. It also disincentivises landlords from upgrading their rental units, resulting in entire neighbourhoods running the risk of becoming decayed and abandoned. Finally, landlords facing lower returns from rental units often convert them into housing units for sale, leading to fewer rental units in the rental market.

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2010 2011 2012 2013 2014 2015 2016 2017

% change

Consumer Price Index (CPI) Average price of college education

Average annual rent

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Another solution that has been surfaced to tackle the problem of rising rents includes giving households tax rebates or welfare payments to offset rent hikes. The money for the system would come from taxes on landlords, which would effectively spread the cost among all tenants and landowners instead of laying the burden on the vulnerable few.

Source: Bloomberg, January 2018 and Los Angeles Times, June 2018 Extract 3: Colleges reduce tuition fees while online courses see higher enrolment US college tuition fees are growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt. In the last three decades, higher education was one of the economy’s most unstoppable growth sectors, with the number of two- and four-year colleges increasing by 33% over the period. However, this looks set to change in the next few years. Due to changes in population demographics, the number of new high-school graduates grew 18% in the early 2000s, but only 2% in 2017. The slowing growth in the number of domestic college-ready students has thus far been offset by growth in the number of foreign students seeking to study in US colleges. The number of Chinese college students in the US ballooned from 67 000 in 2006 to more than 350 000 today due to an emerging Chinese middle class willing to pay full price for a foreign education. Still, college remains a daunting expense for many households. A Federal Reserve survey released in May showed 37% of Americans age 30 and younger who had not attended college said it was too expensive. As a result, some profit-driven colleges have started offering discounts on college tuition fees in a bid to attract students. With traditional university programs getting more expensive and competitive, there has been a boom in the number of alternative degree programmes that are taking advantage of the internet and more flexible teaching and learning formats to fill the gap in the higher education market. Based on data from more than 4 700 colleges and universities, more than 6.3 million students in the US embarked on an online degree in 2016, a 5.6% increase from the previous year.

Source: Wall Street Journal, July 2017 and US News, January 2018 Extract 4: Is college worth it? A recent list of top colleges in the Chronicle of Higher Education provides vivid evidence that higher education is the ticket to economic mobility – according to the Bureau of Labour Statistics, median annual earnings for Americans without a degree amounts to $35 256 while the unemployment rate for the same population is 8%. In contrast, Americans with a degree have a median annual income of $59 124 and 2.8% unemployment. However, the full value of college education goes well beyond dollars and cents. College prepares students to succeed with not only the vocational skills to earn a good living but with the curiosity, adaptability and inclination to respond effectively to the changes and challenges they will face throughout their lives. These benefits extend beyond the college graduates themselves – cities with more college graduates offer higher wages to non-college graduates, all else being equal. And better-educated workers create and develop productive industries; that productivity in turn creates more good jobs for the rest. Ultimately, higher education in New York is a driving force – an economic engine of opportunity for businesses, students, employers and graduates who stay and work in the city, with New York's higher education institutions contributing an estimated $7.5 billion to New York in 2012.

Source: Crain’s New York Business, December 2017

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Extract 5: Are higher education subsidies necessary? The US Department of Education spends tens of billions of dollars a year on subsidies for higher education. The bulk of the spending goes to student aid, with the balance going to educational institutions. Supporters of larger government subsidies to higher education often argue that higher education would be under-provided in the absence of government intervention. But higher education subsidies may not be necessary, and should in fact be reduced. Most people already have a strong incentive to invest in their own higher education even if the government does not subsidise it because it will lead to higher earnings for themselves. As a result, the subsidies disproportionately benefit people who are expected to earn higher future incomes as a result of their advanced educations. By cutting federal subsidies, tuition fees and related costs would be restrained as students shopped around for the best deals. In turn, that would force schools to reduce their bloated costs. In recent years, while student groups and college officials have criticised supposed funding cuts, colleges and universities have been in the midst of a building boom, while administrative staffing has grown rapidly.

Source: Downsizing the Federal Government, November 2015 Questions (a) Figure 1 shows that the average price of college education is increasing at a decreasing rate.

However, the Consumer Price Index does not follow the same pattern. Suggest why this is possible. [2]

(b) Extract 1 states “Those who are less well-off have to make tough decisions: move to a cheaper area or cut back on cellphone services, restaurant outings and other basic necessities.”

Explain the above statement using the concepts of scarcity, choice and opportunity cost. [3] (c) Discuss whether the imposition of rent control is ultimately beneficial to society. [8] (d) With reference to Extract 3, explain why “some profit-driven colleges have started offering

discounts on college tuition fees”. [2] (e) Assess whether demand or supply factors account more for why the average price of college

education only increased marginally in 2017. [8] (f) Comment on whether the online courses offered by higher education providers should be

considered as public goods. [4] (g) Using evidence from the data, explain the determinants of a rational prospective student’s

decision on whether to participate in college education. [6] (h) “Supporters of larger government subsidies to higher education often argue that higher

education would be under-provided in the absence of government intervention. But higher education subsidies may not be necessary, and should in fact be reduced.” Using evidence from the case study and/or your own knowledge, discuss whether the US government should increase or decrease subsidies to higher education. [12]

[Total: 45]

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Answer all questions.

Question 1: The milk industry

Table 1: Production of dairy milk (in million tonnes)

2012 2013 2014 2015 2016 India 133.7 138.1 141.7 148.2 160.4

US 90.9 91.4 93.5 94.5 96.3

China 44.2 40.3 42.5 42.5 40.9

New Zealand 19.7 19.2 20.6 21.9 21.6

Source: UN’s Food and Agricultural Organisation, accessed on 31 May 2018

Extract 1: The dairy milk industry cowed

Since 2008, New Zealand has enjoyed an export-led dairy boom that has earned it the nickname of “the Saudi Arabia of dairy milk” and driven a rapid expansion of its farm industry. The South Pacific nation is the world’s biggest exporter of dairy milk, which account for a quarter of everything it sells overseas. But a halving of dairy milk prices since early 2014 is turning New Zealand’s farming boom to bust.

The pain is being felt across an industry that stretches from the Pacific to the European Union (EU) and North America and employs millions. Almost one-tenth of all dairy milk produced is exported across borders in a trade worth $140 billion a year.

The crisis was triggered partly by weaker than expected demand, particularly from China, the world’s biggest buyer of dairy milk, where dairy milk imports fell by a fifth between 2014 and 2015, according to the United Nation’s Food and Agricultural Organisation.

The prolonged decline in prices is a global phenomenon which is prompting a restructuring of farming practices, milk processors and suppliers. It is also raising the pressure on governments to intervene and support farming communities.

In response, in addition to original aid committed to dairy farmers, the EU has made an additional €1 billion available in aid to farmers, by stockpiling dairy milk and related products to try and force prices up. However, such subsidies are not welcome everywhere. “We view these EU subsidies as short-sighted,” says Nathan Guy, New Zealand’s Agricultural Minister. “These subsidies lock dairy farmers into unprofitable businesses.”

To date, New Zealand’s economy has weathered the storm due mainly to construction linked to the rebuilding of Christchurch after the 2010-11 earthquakes and a housing boom. But on Thursday the central bank cut interest rates by 0.25 per cent to a new record low of 2 per cent, in a bid to weaken a strong New Zealand dollar that is hurting its dairy milk exports.

However, dairy milk producers remain optimistic that the situation will improve, as countries like China will unlikely become self-sufficient for dairy milk in the near future.

Source: Adapted from FT.com, 11 August 2016

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Extract 2: Producers of dairy milk and their responses to dairy milk price changes

Farmers are like all other entrepreneurs. They seek to grow their business and export their products. And not too long ago, it seemed like a great time to do both. Dairy milk quotas, which had capped production in Europe for decades, were being dismantled, and the export market seemed to be growing.

But economic crisis struck around the world, with incomes falling along with demand. There are 23.6 million cows in European barns now, with each producing around 10,000 litres of milk per year.

Why don't the farmers just produce less? "Farmers need liquidity," explained Jutta Weiss, a spokeswoman for BDM, an association of German dairy farmers. They have to buy feed, pay rent, service credit. Fresh money only comes in when milk is sent out. So, if a farmer stops milking, he or she will immediately go bankrupt. Plus, all the excess milk will go to waste.

Farmers continue to sell their milk, trying to scrape together enough money to get by, which of course adds to the glut and presses prices down even further. Dairy farmers are trapped in "a vicious circle," as BDM calls it. And not only those in Europe.

Source: Adapted from Deutsche Welle, 27 May 2016

Extract 3: The impact of other markets on the dairy milk industry

Current dairy milk production is being stimulated by low feed prices, which were driven by record yield seasons in 2013 and 2014, similar levels in 2015 and new projected highs this year in 2016. The advent of large-scale fracking has resulted in a significant reduction in the price of oil. This will first have an impact on the biofuel market, which is a substitute for oil. Subsequently, this will affect the corn market, which is used to produce biofuel as well as feed for dairy farms.

Eighty percent of US dairy milk farm costs are feed. The reduction in feed costs from US$29.26 in August 2012 to US$18.04 per 100 kg of dairy milk in June 2015 has greatly increased farmers’ profits.

Source: Adapted from The Conversation (Australian news source), 12 May 2016

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Extract 4: Almond milk sales continue to surge, as dairy milk contracts

With plant-based diets increasingly popular in the US, milk alternatives – milk products that do not come from animals – are seeing strong sales growth and increased innovation, while sales of dairy milk are contracting. Milk alternatives such as almond milk, are especially popular, with sales having grown by 250% in the past five years. This, in spite of the fact that milk alternatives are typically more expensive than dairy milk.

Consumers’ increasing interest in almond milk and disinterest in dairy milk, is likely due to general health and wellness concerns. Unlike dairy milk, almond milk does not pose a threat to consumers who are lactose intolerant, or who worry about hormones or antibiotics that could be found in dairy milk due to injections given to cows to stimulate milk production. In addition, almond milk is more delicious in taste and texture as compared to other milk alternatives and is appealing to consumers looking to switch away from dairy milk.

Sources: Adapted from Food Navigator, 14 Apr 2016 & The Guardian, 21 Oct 2015

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Questions

(a) (i) Compare the trends in the production of dairy milk for New Zealand, US, India and China over the period of 2012 to 2016.

[2]

(ii) Suggest a reason why New Zealand is the world’s biggest exporter of dairy milk (Extract 1), even though the US, India and China each produce more dairy milk.

[1]

(b) (i) Explain the likely value of price elasticity of demand for dairy milk.

[2]

(ii) Explain the likely value of price elasticity of supply of dairy milk.

[2]

(iii) With reference to Extracts 1 and 2 and using a supply and demand diagram, explain how one demand factor and one supply factor have led to the halving of global dairy milk prices since early 2014.

[6]

(c) Explain the likely impact of the halving of global milk prices on each of the

economic agents – consumers, producers, government – in New Zealand. [9]

(d) With reference to Extract 3, explain how changes in oil prices can impact

the dairy milk market, and comment on one factor that would determine the extent of the impact.

[7]

(e) Explain the factors affecting consumers’ decision-making to switch from

dairy milk to almond milk. [4]

(f) Using evidence from the case study and your own knowledge, discuss the

view that subsidies for dairy milk producers are “short-sighted” and should be discontinued.

[12]

[Total: 45]