1. Study the extract below and answer the questions that follow.

Texas oil tycoon aims to harness power of wind .

(1)One of the biggest problems facing the United States (USA) in the next 50 years is how to satisfy its energy demands. This will require some tough choices involving opportunity cost. Currently the USA imports 70 % of its oil needs. Should US oil drilling be increased or is the answer to expand the use of wind energy? 

(2)T Boone Pickens, an American businessman is famous for thinking big. Over the next four years he intends to erect 2700 wind turbines across Texas at a cost of US$54 billion. His scheme is five times bigger than the world’s largest wind farm, and when finished will generate enough electricity for one million homes. His idea is to use wind-generated energy as a substitute for natural gas used to produce electricity. The natural gas will then be used to fuel cars in order to reduce the demand for oil. Pickens aims to make a gross profit of 25 %, aided by a government subsidy for alternative energy creation. 

(3)Texas, with its wide open spaces, low population and steady winds, should be perfect for wind-generated energy. Pickens has persuaded neighbouring farmers to join his scheme in return for annual payments of between US$10 000 – US$20 000 for each turbine on their land, which will not interfere with farming. Pickens refuses to have any of the turbines on his own property because “they are ugly". 

(4)The nearby town of Sweetwater is in the middle of a huge “construction boom” that is increasing investment demand. Two new companies have just opened, one to service the blades of the 2700 turbines, and another renting out cranes to build the new turbines. These new economic opportunities have increased the population of the town and created many new jobs, not only in the manufacture of the turbines and blades, but also in their maintenance. New roads and houses are being built, while local schools and medical centres have been renovated using the extra tax revenue from the energy companies. 

(5)Supporters of the Pickens plan believe the US economy will benefit, through increased direct foreign investment, increased private domestic investment and a decreased need to import oil from overseas, all of which will contribute to economic growth. 

(6)Opposition to the wind farm has come from environmentalists who are concerned with the negative impact on wildlife and the destruction of the habitat of a rare bird. Concern has also been expressed about the noise the turbines will make and the visual pollution to what was a scenic area.

(a) Define the following terms indicated in bold in the text:

(i) opportunity cost (paragraph(1))

(ii) investment (paragraph(2)).

(b) Using an appropriate diagram, explain how a subsidy is likely to affect the price and quantity of wind-generated energy.

(c) Using an AD/AS diagram, explain how increased private domestic investment and a decreased need to import oil from overseas are likely to contribute to economic growth in the US economy (paragraph (5)).

(d) Using information from the text/data and your knowledge of economics,evaluate the decision to construct the world’s largest wind farm in Texas.


2. Study the extract and data below and answer the questions that follow.

Pakistan’s economy

(1)There was a positive transformation in the Pakistani economy in the early 2000s. The exchange rate was allowed to float, exports of primary commodities increased along with foreign direct investment and foreign reserves, while government debt fell. 

(2)By 2007, however, Pakistan faced a number of political and economic problems. In addition to political instability, there were hailstorms and diseases destroying crops, which led to large increases in food imports. The price of imported raw materials continued to increase with 27 % of the higher import expenditure due to the increase in oil prices. Industrial production began to fall. Foreign investment in shares fell from US$1.5 billion in 2006 to US$97 million. 

(3)These events have led to Pakistan’s highest current account deficit ever, amounting to 8.6 % of Gross Domestic Product (GDP) (June 2008).

(4)What is the government doing? The new budget (2008–2009) aims to reduce the budget deficit from 7 % of GDP to 4.7 % (by raising tax revenue and reducing government expenditure). It will also introduce tariffs and quotas. While the introduction of tariffs could help reduce the twin deficits (budget deficit and current account deficit), it could reduce consumer welfare and lead to an inefficient allocation of resources. 

(5)The government is preparing a plan aimed at increasing foreign exchange earnings through export-led growth. The intention is to diversify production and exports in industries in which Pakistan has a comparative advantage, making better use of the country’s abundant labour supply and natural resources.

(a) Define the following terms indicated in bold in the text:

(i) foreign direct investment (paragraph (1))

(ii) inflation (Table 1).

(b) Using an appropriate diagram, explain how the continuing increase in prices of imported raw materials (paragraph (2)) could have contributed to the impact on the general price level and output in 2008 (Table 1).

(c) Using the data from Table 1, explain two factors that might contribute to the estimated fall in the inflation rate in 2009.

(d) Using information from the text/data and your knowledge of economics,evaluate the impact on the Pakistani economy of the decision to introduce tariffs (paragraph (4)).




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