Economics · May / June 2018 · Paper 22 · Question 1

Crisis in the ice cream market Vanilla is used in the production of soft drinks, cakes and perfumes. Its main use, however, is in the production of ice cream. Fig. 1 shows the different costs of making ice cream for one firm. Fig. 1 The costs of producing ice cream for one firm raw materials including vanilla other wages insurance security lighting rent Madagascar is the world’s largest supplier of vanilla followed by Mexico and Tahiti. At the start of 2016, economists expected the price of ice cream to increase as the price of vanilla had risen by 130% in 2015. This was largely because of the poor harvests in Madagascar which reduced the output of vanilla in 2015. Ice cream is seen as a luxury product in most countries. It has a range of substitutes and this is one reason why producers do not always pass on higher costs to consumers. In 2015, there were a number of other changes in the production of ice cream including a rise in the productivity of the workers. As well as vanilla, Madagascar produces a number of other primary products including coffee and sugar. Nearly 80% of the country’s labour force is employed in the primary sector. The country has a relatively low Gross Domestic Product (GDP) per head and a relatively low Human Development Index (HDI) value as shown in Table 1. This limits the amount that people in Madagascar save. 3 Table 1 GDP per head and HDI in selected countries in 2015 Country GDP per head (US$) HDI Argentina 22 400 0.836 Bangladesh 3 600 0.570 Cuba 10 200 0.769 Egypt 11 500 0.690 Ghana 4 300 0.579 Madagascar 1 500 0.510 Half of Madagascar’s population live in poverty. The government is trying to reduce poverty by introducing a programme of cash benefits. It is hoped that one effect of this will be to increase school enrolment and attendance of the children of poor families. To increase economic growth, the government has sold off a number of state-owned enterprises and is moving the economy towards a market system.

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