Candidate Name: __________________________ Index no.

: ______ PIONEER JUNIOR COLLEGE JC 2 PRELIMINARY EXAMINATIONS 2007

CT Group: ______

ECONOMICS
Higher 2 Paper 1 Friday Additional materials: Answer paper INSTRUCTIONS TO CANDIDATES Do not open this booklet until you are told to do so. 14 SEP 2007

9732/01

2 hours 15 mins

Write your name, CT group and index number in the spaces provided on all the answer papers provided. Answer all questions. Begin Question 2 on a fresh sheet of paper. At the end of the examination, you will be required to hand in your answers to Question 1 and Question 2 separately. The number of marks is given in brackets [ ] at the end of each question or part question. You are reminded of the need for good English and clear presentation in your answers.

This question paper consists of 8 printed pages (inclusive of this page)

Answer all questions Question 1 The market for anti-HIV drugs

Extract 1: AIDS: Branded and Generic anti-HIV drugs

Roche, the pharmaceutical giant, recently announced a price of $20,424 for a year's supply of its anti-HIV drug Fuzeon in U.S. This was almost three times the price of the most expensive AIDS drug. Roche claimed that Fuzeon is more expensive to produce than other anti-HIV drugs, claiming that it spent $600 million developing the drug. However, many HIV drugs that cost up to $15,000 a year in the U.S. can be made for less than $300 a year by generic manufacturers overseas. These generic firms are allowed to enter the market and sell copies of the original drug when the pharmaceutical patent expires. As generic drugs contain exactly the same active chemical substances, these are considered as good substitutes to the original branded drugs. Meanwhile, as the AIDS pandemic is killing many millions of people in the prime of their lives and producing millions of orphans in Africa, public-health officials and grass-roots activists in Africa are increasingly advocating that the government buy generic drugs, even if it means that intellectual-property rights are violated. As a result, the five drug companies which supply antiHIV drug, Glaxo Wellcome, Bristol-Myers Squibb Co., Merck & Co., Boehringer Ingelheim GmbH of Germany and Roche Holding Ltd. of Switzerland, had offered to discount their prices in many developing countries because they fear the developing countries will buy generic copies of their drugs produced by generic drug producers such as Cipla in India and other companies in Thailand and Brazil. In recent months, Ghana, an African country, had begun exploring the option of doing just that. But a debate is now raging as to whether such actions would violate the companies' patents and international intellectual property agreements. The pharmaceutical companies argue that without intellectual-property protection they would have no incentive to invest the millions required to discover and develop new drugs. In addition, there is usually only one successful drug out of the many hundreds of rejected drugs. Ghana may represent only a sliver of Glaxo's revenue, "but where do you draw the line?" asks Martin Sutton, a Glaxo spokesman. In particular, Glaxo is believed to be worried that if a small country such as Ghana violates patent protection, that could open a Pandora's box of violations in larger markets, such as South Africa, Latin America and parts of southeast Asia where AIDS is also raging. Figure 1

Sources: World Street Journal, 1 Dec 00 and ACT up press release 13 Mar 03

Extract 2: Regulation of branded drugs

In the past year, critics have complained that prescription drugs are contributing to escalating health care costs in the developed countries. Some also assail drug manufacturers, contending that drug prices are too high. They propose price controls as a way to lower drug prices. Price controls have a consistent history: they don't work. Whether they apply to air fares, gasoline, telecommunications or medicines, they discourage innovation, create shortages and fail to keep prices in check. Further, they harm the poor by making whatever is controlled more difficult and more expensive to obtain. However, according to leading prescription drug price and sales database information company, IMS Health, drug costs are rising primarily because of nonprice factors, including increased volume of prescriptions, record sales of new products and a changing mix of available products. Price increases have been relatively modest over the past 10 years. Figure 2 Composition of Drug Costs

Another solution to the high price of drug is to allow price discrimination whereby the consumers in the developed countries are made to pay a higher price so as to allow lower prices in the developing countries. This is however limited by the increasing number of patients buying lower-cost drugs in other countries, a practice known in the pharmaceutical industry as "arbitrage" or "parallel trade." Sources: National Centre for Policy Analysis Policy Report No. 23 Oct 99 and Focus 16 Apr 04

Extract 3 Intellectual Property Rights

An intellectual property regime rewards innovators by creating a temporary monopoly power, allowing them to charge far higher prices than they could if there were competition. In the process, ideas are disseminated and used less than they would be otherwise. The economic rationale for intellectual property is that faster innovation offsets the enormous costs of such inefficiencies. But it has become increasingly clear that excessively strong or badly formulated intellectual property rights may actually impede innovation and not just by increasing the price of research. Monopolists may have much less incentive to innovate than they would if they had to compete. Modern research has shown that the great economist Joseph Schumpeter was wrong in thinking that incentive of supernormal profits earned by existing monopoly will attract new firms to enter leading to greater innovation and higher economic growth in the country. In fact, a monopolist, once established, may be hard to dislodge, as Microsoft has so amply demonstrated. Indeed, once established, a monopoly can use its market power to squelch competitors, as Microsoft so amply demonstrated in the case of the Netscape Web browser. Such abuses of market power discourage innovation. Moreover, so-called patent thickets the fear that new innovations will tread on pre-existing patents, of which the innovator may not even be aware may also discourage innovation. Furthermore, the creation of any product requires many ideas, and sorting out their relative contribution to the outcome let alone which ones are really new can be nearly impossible. Consider a drug based on traditional knowledge, say, of an herb well known for its medicinal properties. How important is the contribution of the American firm that isolates the active ingredient? Pharmaceutical companies argue that they should be entitled to a full patent, paying nothing to the developing country from which the traditional knowledge was taken, even though the country preserves the biodiversity without which the drug would never have come to market. Not surprisingly, developing countries see things differently. Source: Daily Times, 16 Aug 05 by Professor Joseph E. Stiglitz Questions (a) (i) (ii) Describe the changes in sales of Glaxos AIDS drugs from 1997 to 2000 using Figure 1. [2] Using a diagram, explain how the change in number of AIDS patients and entry of generic AIDS drug producers affect the market for branded AIDS drugs. [4] Drawing evidence from the data, identify and explain the type of market structure that the AIDS drugs producers operate in. [4] With the use of data, assess whether government should implement price controls on AIDS drugs. [6] Explain how price discrimination works in the market for AIDS drugs and analyse whether price discrimination can be effectively carried out in this market. [6] [8]

(b)

(i)

(ii)

(iii)

(c)

Evaluate the desirability of an intellectual property regime for all markets.

Question 2 Diversification in Singapore

Extract 1: Chinas Rise as a Manufacturing Powerhouse Implications for Asia Chinas ascendancy in manufacturing has altered the regional production landscape. China has become a major competitor to the East Asian 7 (EA-7) economies of Korea, Taiwan, Singapore, Malaysia, the Philippines and Thailand, both for inward FDI to the region and exports to the Group of 3 main world (G3) economies of the United States, Japan and Germany. China has become a major competitor in not just exports of consumer goods, but increasingly in low and mid-range capital and intermediate goods as well, especially in low-end electronics. Analysis shows that for exports to the G3, the EA-7 economies have lost ground to China in varying degrees. This is true not just in labour-intensive consumer goods, where the NIE-3, which include the 3 newly industrialized economies of Singapore, Korea and Taiwan, are disadvantaged because of their higher wage costs, but also in low-end capital and intermediate goods exports. However, China has imported an increasing amount of higher end inputs and raw materials (in which it does not have a comparative advantage in) from the EA-7 to feed its own production of goods for exports, thus driving intra-East Asian trade. The FDI inflows to China have posed considerable competition to the EA-7 economies as there were significant overlaps in manufacturing capabilities. FDI inflows into China surged over 900 times between 1980 and 2004, while inward FDI into the EA-7 economies fell after the 1997 Asian Financial Crisis. Chinas share of FDI inflows into Asia rose from 2% in 1980 to 65% by 2004, while the EA-7s share fell from 98% to 35% in the same period. However, with China assuming the role of the key node within the regional production network, it has also become an important market for the EA-7s exports. In particular, China has been a key catalyst in spurring intra-Asian trade due to its growing demand for capital and intermediate goods, as well as raw materials. As a result of Chinas rising dependence on foreign inputs, the share of foreign value-added in Chinas processed exports has been rising.
Adapted from: MAS Staff Paper No. 42, December 2005

Extract 2: Integrated Resorts in Singapore Singapore's electronics industry is struggling to cope with cheap competition from places like China. In the first quarter of this year, output shrank by 5.8% at an annual rate. So the government wants to promote tourism and other services to make up for vanishing jobs in manufacturing, as well as to pursue its other macroeconomic objectives. In particular, the government has decided to increase Singapores attractiveness as a tourist destination by inviting proposals to open two integrated resorts. Looking at the tourism sector, this is just one component in our whole economy. The tourism sector has been doing well the last few years. However, looking from a 10-year timespan, Singapore has lost a bit of our market share and this is where the integrated resorts come in. Indeed, most analysts and industry watchers are decidedly bullish over the economic prospects and spin-offs an integrated resort will bring to Singapore, although social costs are still hard to quantify. Merrill Lynch, an investment bank, reckons the two proposed integrated resorts could bring in as much as $4 billion in the initial investment alone. According to its estimates, they would have annual revenues of up to $3.6 billion, and pay at least $600m in taxes and fees. One of the most detailed reports released to date by Wall Street giant Merrill Lynch clearly spells out the benefits to Singapore's economy and industries, citing direct benefits to tourism and construction, and indirect benefits to the retail and hotel sectors. In fact, studies have estimated that for every 10 jobs created at a casino, there were between two and four additional jobs in the community. In addition, the two integrated resorts will play a key role in the growth of the MICE (meetings, incentives, conventions and exhibitions) sector in Singapore.

The report estimated that if a mega-resort is built, and tourism targets are met, Singapore's GDP will be 15.4 per cent higher in 2015 than it was last year. Comparatively, it estimated that GDP would grow by only 6.1 per cent without a resort. However, the report argues that a mega-resort could still be successful without a gaming element, and also questioned some of the assumptions underlying the arguments for a casino including the belief that it would attract large numbers of foreign gamblers and provide funds to cross-subsidise other attractions. At the same time, even though the integrated resorts are expected to generate some 10,000 jobs, most of the mid-level and senior positions are unlikely to be filled by Singaporeans - at least not immediately, a US academic and tourism expert has said. Chris Roberts, a University of Massachusetts professor who teaches and does research on casino and resort management, said that he believes Singaporeans are unlikely to have the expertise to take up mid- and high-level jobs at the IRs until they are properly trained.
Adapted from: 1. 2. 3. Dicing with vice, the Economist, 21 Apr 2005 Analysts upbeat on casino resort's economic spin-offs, Business Times, 18 April 2005 S'poreans seen landing only entry-level jobs at IRs, Business Times, 25 August 2005
th th st

Figure 1: Selected Key Macroeconomic Indicators for Singapore, 2000 2006 Real GDP Growth (%) Unemployment Rate (%) Export Growth Rate (%) Exchange rate (S$/US$) Labour Productivity (% change) Employment by Sector (%) Manufacturing Construction Services Others 2000 10.1 2.7 11.6 1.7239 NA 20.5 14.2 64.5 0.8 2001 2.4 2.7 2.4 1.7917 5.7 19.8 13.2 66.3 0.7 2002 4.2 3.6 7.2 1.7906 5.7 19.8 11.8 67.7 0.7 2003 3.1 4.0 NA 1.7422 4.4 19.7 11.0 68.6 0.7 2004 8.8 3.4 18.5 1.6903 7.0 20.2 10.3 68.9 0.6 2005 6.6 3.1 10.7 1.6646 2.1 20.5 10.1 68.7 0.7 2006 7.9 2.7 11.4 1.5889 1.2 20.7 10.2 68.4 0.7

Source: Ministry of Manpower, Department of Statistics

Figure 2: Selected Key Economic Indicators for China, 2000 2006 2000 Real GDP Growth (%) Unemployment Rate (%) Export Growth Rate (%) Import Growth Rate (%) FDI inflows (US$ bn) Inflation rate (%) 8.4 3.1 27.8 NA 40.7 0.4 2001 8.3 3.6 6.8 NA 46.9 0.7 2002 9.1 4 22.4 21.2 52.7 0.8 2003 10 4.3 34.6 39.8 53.5 1.2 2004 10.1 4.2 35.4 36.0 60.6 3.9 2005 10.2 4.2 28.4 17.6 60.3 3.0 2006 10.7 4.1 27.2 20.0 63.0 3.8

Source: Ministry of Commerce of the People's Republic of China, International Monetary Fund, the US-China Business Council

Figure 3: Singapores Flow of Foreign Direct Investment

Source: Department of Statistics, Singapore

Questions (a) (i) Describe the trend in FDI inflows and real GDP growth for China from 2000 to 2005. [2] (ii) Using AD/AS analysis, explain the theoretical relationship between FDI inflows and real GDP growth. To what extent is this relationship illustrated in the case of China? [6] (b) To what extent does the data suggest that the rise of China poses a challenge to the manufacturing sector of EA-7 economies? [6]

(c) (i) Compare the relative share of employment in the services and manufacturing sectors in Singapore from 2000 to 2006. [2] (ii) Explain the differences in the relative share in c(i). [2]

(d) (i) With economic analysis, explain the spillover effects of having an integrated resort on the rest of the Singapore economy. [4] (ii) With reference to the extracts and data, assess the effectiveness of the strategy to promote tourism and other services for the Singapore economy. [8]