PRACTICE EXAM PAPER

Pearson Edexcel
Economics (A)
Advanced
Practice Paper 3
Question Paper
Paper 3
Microeconomics and macroeconomics
 Write your name here
Surname Other names

Centre Number Candidate Number

Economics (A)
Advanced
Paper 3: Microeconomics and macroeconomics
Practice paper Paper reference
Time: 2 hours Paper 3
You do not need any other materials Total Marks

Instructions
• Use black ink or ball-point pen
• Fill in the boxes at the top of this page with your name, centre number and candidate number
• There are three sections in this question paper. Answer all questions from Section A and
Section B. Answer one question from Section C
• Answer the questions in the spaces provided – there may be more space than you need

Information
• The total mark for this paper is 100
• The marks for each question are shown in brackets – use this as a guide as to how much time
to spend on each question

Advice
• Read each question carefully before you start to answer it
• Try to answer every question
• Check your answers if you have time at the end

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Section A
Soaring vanilla prices in Madagascar

Sources: Mintec
Extract 1
Behind the prices
The price of vanilla beans rose to over $500 per kilogram in 2004, said David Vanderwalde of Aust and
Hachmann, a vanilla bean buyer. This prompted new vanilla growers outside of Madagascar to enter the
market, leading to a significant increase in supply and consequent crash in the price of vanilla. Vanilla sold
for just $20 per kilogram in 2008-2010.

Only Madagascan producers could support the fall in the price of the labour intensive product. Wages in
Madagascar are about $1.50 per day while wages in other regions average about $10 per day.

Since vanilla prices are high again, growers in other countries may consider getting back into the vanilla
market, but it’s not that easy. After planting vanilla beans, it will take four years for the crops to develop.

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Quality is also an issue

While vanilla beans are costing more, quality has become a problem. Quality is best at $20 a kilogram and
worst at $600 a kilogram, another expert said. “There’s always an inverse relationship between price and
quality. When prices are high, it gives farmers an incentive to pick the beans before they reach maturity.
Immature beans lack flavour.”

The combination of high vanilla bean prices and poor quality may lead firms for whom vanilla is a key
component in production to seek alternatives such as synthetic vanillin.

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Extract 2
Fairtrade Vanilla
Two companies, Malagasy and Madécasse Chocolate, are working to increase income in Madagascar
by producing chocolate in the country. Neil Kelsall, marketing director for Malagasy, says “Ninety-eight
percent of Fair Trade chocolate is manufactured and packaged in Europe.” As Andrew Pervis, writing in the
Guardian states, “Of the revenue generated by a £1.70 bar of Fair Trade chocolate, for instance, only five
per cent (8.5p) remains in the country of origin while the rest is dispersed in wealthy northern nations.”

The idea behind the initiative is to produce the finished product in the country, rather than exporting the raw
materials. Therefore the country should receive a greater income.

“All it would take to end poverty in Madagascar is £750m a year,” says Kelsall, “but there aren’tenough
cash crops to do that.” Kelsall believes that this production could see “poverty ended.” Poverty in Madagascar
is very high. 89.6% of Madagascar’s 20 million people live on less than US$2 a day. The company is trying
to enable the country to add value and improve skills.

“One impact is that the villagers now have electricity,” says McCollum. “With the income they have earned
working with Madécasse the villagers purchased a generator to produce electricity, which is not available
otherwise. Another impact has been to teach basic financial literacy like opening up a bank account. A high
percentage of people in Madagascar are illiterate so teaching them how to manage money is a huge help.”

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Extract 3
Poverty in Madagascar
Nearly 1.9 million people in southern Madagascar do not have a secure food supply according to
government and UN figures published recently. This is due to severe weather conditions in the country.

The country has seen droughts, floods and locust swarms along with high temperatures and a lack of rain.
They have also seen an outbreak of the plague recently. Almost half of children under five suffer chronic
malnutrition, yet less than 0.5% of the national budget is spent on the problem. This condition can cause
damaging effects of the children’s long term mental and physical development. The impact can be the
equivalent to two or three year’s loss of schooling.

1 (a) With reference to figure 1, explain one possible reason for the change
in the price of vanilla in 2015. (5 marks)

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(b) With reference to Figure 1 and Extract 1, examine the likely impact on farmers’
revenues of an increase in the price of vanilla. (8 marks)

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(c) With reference to the information provided, discuss the likely impact of the investment
from companies such as Madécasse on unemployment levels in Madagascar. (12 marks)

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Either

(d) With reference to the information provided and your own knowledge, evaluate the possible
microeconomic and macroeconomic effects of an increase in foreign aid on the economic
development of Madagascar. (25 marks)

Or

(e) With reference to the information provided and your own knowledge, evaluate the
comment that macroeconomic growth is necessary for microeconomic development
in Madagascar. (25 marks)

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Section B
Extract 1
In March 2016, India’s Tata Steel announced plans to sell its UK steel business, putting thousands of
jobs at risk. In mid-2016, the company employed 15,000 workers in the UK, and planned to reduce its
workforce by 1500, after a previous reduction of 750.

The UK steel industry has been hit by high energy prices which have significantly increased its production
costs, as well as the additional cost of compliance with climate change regulation and increasing levels of
competition from China.

Demand for steel worldwide is still low compared to before the financial crisis. Many countries are still
facing low economic growth therefore not producing at previous levels. The price of steel has fallen, and
China has increased its global supply as there is no longer the same level of domestic demand for it.

UK steel crisis
As a result, UK imports of low priced Chinese steel have increased dramatically. In 2014 the UK imported
687,000 tonnes of steel from China, up from 303,000 tonnes in 2013. The price difference was on average
583 euros a tonne for Chinese imports in 2014, compared to 897 euros a tonne for European steel.

High UK energy costs for energy-intensive businesses like steel production are also a factor, says the
industry, added to by the extra cost of climate change policies. And government policies to compensate
producers for these extra costs have been too slow, says the industry body UK Steel.

It is urgent that the government starts to take action to support the industry, as currently around 18,000
people are directly employed in the steel industry. With a total UK workforce of 31 million this is one in
1,700 jobs.

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What can be done?

The industry has stated it needs: lower business rates, less regulation of carbon emissions for heavy
manufacturers, help with high energy prices, and a commitment that British steel is used in major
construction projects.

Though the government has tried to support the steel industry, more needs to be done. Terry Scuoler, chief
executive of EEF (a manufacturer’s organisation), states “Ministers can also do more by reforming business
rates to exclude some of the penalties steel companies and others face if they invest in plant
and machinery.”

“Alongside this, the UK has one of the highest electricity costs for the energy intensive industries in Europe
because of hindering domestic policy. We need to see a level playing field with our European competitors
to ensure a positive future for the steel sector,” he says.

Figure 1

Sources: ISSB

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Figure 2

Sources: ISSB

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2 (a) With reference to Figure 1, explain the impact of China’s production

of steel on the global steel market. (5 marks)

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(b) With reference to Extract 1, examine the impact trade unions could have
on securing jobs in the steel industry. (8 marks)

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(c) With reference to the information provided, discuss the policies the British government
could use to support the UK steel industry. (12 marks)

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Either

(d) With reference to the information provided and your own knowledge, evaluate microeconomic
and macroeconomic policies that the UK government could use to support the economy in the
face of greater competition from China. (25 marks)

Or

(e) With reference to the information provided and your own knowledge, evaluate the macroeconomic
and microeconomic impact of the government tightening legislation on climate change. (25 marks)

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