ACJC International Trade Answers Case Study 2

2024 International Trade Tutorial Worksheet: Case Study Question 2 2020 A Level H2 Economics: The Dangers of a Trade War (a) With reference to Table 4, state the two components of Singapore’s current account, other than the goods and services balance. [2] Note: ‘state’ would mean literally stating without the need for explanation The two components of the Singapore’s current account, other than the goods and services balance is the primary income balance and secondary income balance. (b) Using a production possibility curve diagram(s), explain the likely impact of the change in labour force described in Extract 6 upon China’s economic growth. [2] Identify the changes in China’s labour force as in Extract 6 • “falling birth rates” and “ageing population” Explain the changes: • Fewer birth to replace the retiring workers  shrinking labour force • Composition of labour force is also mostly ageing  elder workers may have lower quality of labourforce as economy advances (drop in productivity)  lower overall quality of labour • The decrease in the quantity and quality of labour resource  lower the maximum amount of goods the economy can produce • China’s production possibility curve will shift inwards from C0K0 to C1K1 as China’s productive potential decreases  falling potential economic growth Cambridge report (FOR TEACHER’S REFERENCE ONLY) Most candidates showed good understanding of production possibility curves and explained the impact of the change in the labour force upon China’s economic growth. Diagrams were accurately drawn and had appropriate axes in most cases. Stronger responses showed how the impact of China’s ‘ageing population and shrinking labour force’ would lead to a shift in China’s production possibility curve to the left as China’s productive potential declined. (c) With reference to Extract 7, explain why it might be claimed that a floating exchange means that the Chinese economy ‘was well placed to withstand external shocks’. [4] Capital goods Consumer goods K1 C1 K0 C0

• China adopting a floating exchange rate would mean that China’s exchange rate will be determined by the demand and supply of Chinese Yuan in the foreign exchange market • With the US imposing significant tariffs on a wide range of Chinese imports, the demand for Chinese goods and services by Americans will fall , leading to a large decrease in demand for Chinese yuan in the FOREX market causing the Chinese yuan to depreciate • W ith a depreciation of the Yuan, Chinese goods and services will now will cheaper in foreign currency, China’s exports will now be more price competitive as foreigners require less of their currency to purchase a unit of Yuan. • This can help to improve China’s X-revenue, assuming that the demand for Chinese’s X is price elastic. This will improve China’s BOT, even though USA imposed tariffs on China, helping China to withstand external shocks. Cambridge report (FOR TEACHER’S REFERENCE ONLY) This question was less well done with many candidates, showing confusion over the implication of a floating exchange rate for China’s economy. Many stated correctly that a floating exchange rate would be determined by market forces, but then went on to explain how exchange rate intervention by the Chinese monetary authorities would be used to offset external shocks to the Chinese economy. (d) Explain two factors that will determine the impact upon the US balance of trade if China raises tariffs on imports from US. [4] This was a common last topic question in the year of examination 2020. Factor 1: PED for the US imports into China. If the PED for this US imports is generally price elastic, the higher tariffs imposed on the US imports will lead to a more than proportionate drop in the quantity demanded. This means the overall M-spending by China on US imports will fall, leading to a fall in US’s X-revenue, worsening the US balance of trade. Factor 2: Composition of China’s imports spending as a % of US’s trade balance With the fall in X-revenue from China, whether it will lead to an overall worsening of US’s trade balance is depending on the proportion of that as a percentage of US’s trade balance. Based on the Extract 7, it is mentioned that the value of China imports from the US is far less, hence it may unlikely to lead to a significant drop in export revenue for the USA. S o overall US’s trade balance is unlikely to worsen significantly. (e) Explain how supply-side policies aimed at Singapore’s labour market could ‘make the economy more resilient’ and consider how likely they are successful. [8] Question analysis: Command “Explain how” supply-side policies works (from Extract 8) for Singapore’s economy to be more resilient – i.e. to achieve economic growth in the midst of the global trade war between US and China and the shifts in global and regional trade pattern.

The supply-side policies in Extract 8 to focus on: • recycle factors of production from less-productive to more-productive sectors • re-training workers for entry into newer markets • increase foreign workers in productive parts of labour market “consider how likely” the policies can work for Singapore Concept ADAS framework, multiplier effect Context Singapore labour market Introduction: • With rising trade tension between US and China, some economists believe that it would slowdown the growth of major economies, including China (Extract 8). This can have adverse impact on Singapore’s economy given these are her major trading partners, such as slower / weaker exports -growth since household incomes from China and US may be slowing down. • Hence, to help Singapore’s economy to remain resilient, one of the ways that Singapore’s government would be focusing on would be to focus on Supply- side policies to encourage greater efficiency in the labour market. R1: Explain how supply-side policies works to achieve economic growth (Amid the global trade war between US and China and the shifts in global and regional trade pattern) Economic analysis of supply-side policies: 1. Re-training workers for entry into newer markets 2. Recycle factors of production from less-productive to more-productive sectors 3. Increase foreign workers in productive parts of labour market - Better quality of labour force through retraining  gain more skills and hence are more productive  more productive means that the output per input increases and this can lead to falling unit cost of production per output if the productivity growth outweighs the wage growth  firms can produce more with lower unit cost  SRAS increase (shift right)  firms are more willing and able to produce more goods and services, hence increasing RNY  achieving actual economic growth - Low er unit COP may also means firms are more willing and able to pass on the cost savings to the consumers by lowering the prices of the goods and services, as seen by the fall in GPL from GPL0 to GPL1. - Increase labour supply in productive sector can also bring down wages, according to the demand and supply price adjustment process.  contributes to a further fall in unit COP. - A t the same time, the more productive workforce together with the lower unit COP would also be able to attract investors to invest into such productive sectors which have higher potential returns (earn higher future profits)  (I) increase  AD increase (AD0 to AD1)  higher RNY  actual Economic growth (assume economy is not at full capacity yet)

• Multiplier effect: The higher AD leads to a fall in inventories, signals to producers to increase production, which will lead to them hiring more workers and invest more  further rise in AD via induced C and I  (the cycle continues until all initial injection is le