ACJC H2 Prelim 2024 P2 EQ5 Solutions

5(a) Explainwhyagovernment shouldavoidalargeandpersistent balanceoftradesurplusanddeficit. [10] QuestionAnalysis CommandWord “Explain”● Start:BOTsurplus&deficit● End: Negativeconsequences, andhenceaconcernforthegovernment● Noevaluationneeded Concept ● UnpackBOTsurplusanddeficit● HarmsofBOTsurplusanddeficit Context General Introduction:Thebalanceoftrade(BOT)isthedifferencebetweenacountry'sexportrevenue(X)andimportexpenditure(M).MostcountriesaimforeitherBOTsmallsurplus(X>M)oraBOTequilibrium,wheretheX=M. Requirement 1: Governmentstendtoavoidalargeandpersistent BOTdeficit becauseit couldlower thestandardof living(SOL) for futuregenerations. Notetostudents: Youareencouragedtoprovideatleastmorethan1negativeconsequencesduetoalargeandpersistentBOTdeficit. Alargeandpersistent BOTdeficit impliesthat acountry'sX-revenuekeepsfallingandM-expenditurekeepsrising. Thissuggeststhat theADislikelytofall. If the country isproducing far belowthe full capacity,thismayleadtonegativeeconomicgrowthduetothereversemultiplierprocess.Inthiscase,thefallinADresultsinan unplanned rise ininventory stocks,signalling firmsto decrease outputandhence,RNOfalls,resultinginnegativeeconomicgrowth.Furthermore,thisalsoreducesthederiveddemandfor factorsof production(e.g.labour),causingfirmstohirefewer andfiremoreworkers, increasingdemand-deficient unemployment. Thefallinderiveddemandforfactorpaymentsalso reduces factor payments,resultinginafallinhouseholdincome, reducing purchasing power,andinducingafallinCbytheamount equal toMarginal PropensitytoConsume(MPC)xthemagnitudeof thefall inincome.ThiscausesADandRNOtofallagain.Thisprocessrepeatsitselfuntil RNOfallsbyamultipliedamountequalto(1/mpwxoriginalfallinAD). ABOTdeficitimpliesacountry'sX<M.Ifacountrydoesnothavesufficientforeignreserves,itmayhavetoborrowfromtradingpartnerstofinancetheBOTdeficittomanagethefluctuationsinitsexchangerate,assumingthecountryisinafixedormanagedfloatexchangerateregime.Alargeandpersistentdeficitmakesthismorelikelyand

increasesthesizeof theforeigndebt.Thisincreasestheprincipalsumandinterestpaymentsthathavetoberepaidinfuture.Agovernmentmaybeforcedtoraisetaxes(e.g.personalincometax)forfuturegenerationstoraiseenoughrevenuetopayitsdebts,reducinghouseholddisposableincomeandthepurchasingpowerofthefuturegeneration.Thiscouldreducethequantity, qualityandvarietyof goodsandservicesthat canbeenjoyedinfuture,reducingtheirtangibleaspectofwellbeing,andhencematerialSOLofthefuturegeneration. Additionally,ifthisreduceshouseholdaccesstohealthcareornutrition,itcouldalsoreducethe quality of health, leadingtomoreillnessesandalowerlifeexpectancy.Ifthelowerpurchasingpowerreducesaccesstoeducation,itcoulddetersomestudentsfromfurtherstudies,loweringtheaverageyearsofformaleducation.Coupledwithlowerlifeexpectancy,this could lower the HDI value, ceteris paribus, which suggests a lower non-materialstandardoflivingofthefuturegeneration. Notetostudents: (i) ABOTdeficit couldleadtoacurrencydepreciation.LinktotheeffectsofadepreciationsuchasincreaseCOPanddecreaseinSRAS.Thisisespeciallyharmfulforimportreliantcountrieswithlackofnaturalresources. (ii) AlargeandpersistentBOTdeficitmayleadtopoorerquality/loweraccesstobetterqualityimportsworsensSOLfortheresidents Requirement 2: Governments tend to avoid a large and persistent BOT surplusbecauseit mayhavenegativeimpact onother macroeconomicobjectives. AlargeandpersistentBOTsurplusimpliesacountry'sX-revenueisalwayslargerthantheM-expendituregreatly. Forcountriesthatareveryneartothefullcapacity,thislargeandpersistentBOTsurplussuggeststhattheADisrisingbutthereislimitedsparecapacity.AsADincreases, results in an unplanned fall in inventory stocks, signalling firms toincrease output. However, this also increases the derived demand for factors ofproduction(e.g.labour),causingfirmsto hire moreworkers,butduetothelimitedsparecapacity, theincreaseindemandforresourcesleadto higher factor payments,henceincreasingunitcostofproductionoffirms.ThisleadstohigherGPLasthe firms pass onthe higher COPtotheconsumersviaahigherGPL, leading to demand-pull inflation.Thiscouldalsotriggera wage-price spiral,asworkersdemandforhigherwagestocopewiththeincreasingGPLasincomesremainstagnant.Thismaycauseanincreaseinthecostofproductionforfirms,furtherincreasingtheGPLastheypassthisincreaseincoststohouseholds. Note to students: You are encouraged to use the point below to explain the -veconsequences of BOT surplus – this is part of the globalisation and internationaltradetopic. Whilethispoint maynot besocommonlyexplained, thisisagoodpointfor youtoincludewhenexplainingtheimpact of BOTsurplus. AlargeandpersistentBOTsurpluscouldinvitetradingpartnerstoadoptprotectionism(e.g.tariff)toeitherreducetheirimportspendingorprotecttheirownexportrevenueand

domesticconsumption.Atariff,aunittaxmaybeleviedonthecountry’sforeignimports,willraisethepriceoftheexportsforthecountryexperiencingaBOTsurplus.Assumingitsgoodsarenotuniqueandtherearesubstitutesavailablefromothertradingpartners,thedemandforitsexportswill bepriceelastic[|PEDx|>1].Theriseinpricewillresultinamorethanproportionatefall inquantitydemandedforitsexports, causingtheexportrevenuetofall.ThiswillreduceAD(AD0toAD1),ceterisparibus. ThefallinADresultsinanunplannedriseininventorystocks,signallingfirmstodecreaseoutput.Assumingtheeconomyisoperatingbelowthefullemploymentoutput,RNOfalls,resultinginnegativeeconomicgrowth.Furthermore,thisalsoreducesthederiveddemandforfactorsofproduction(e.g.labour),causingfirmstohirefewerandfiremoreworkers,increasing demand-deficient unemployment. The fall in derived demand for factorpaymentsalsoreducesfactorpayments,resultinginafallinhouseholdincome,reducingpurchasingpower,andinducingafallinCbytheamountequaltoMarginalPropensitytoConsume(MPC)xthefallinincome.ThiscausesADandRNOtofallagain.ThisprocessrepeatsitselfuntilRNOfallsbyamultipliedamountequalto(1/(1-MPC)xoriginalfallinAD). Notetostudents: (i) A BOT surplus could lead to a currency appreciation affecting pricecompetitivenessofitsexports.Studentsshouldnotbeinacircularargument,forexample, atradesurplusleadstoaappreciation,henceqtyddofexportdecreases, trade deficit, negative growth. For this point to be analytical,studentsshouldbeexplainingthecontext whereonlyafewindustriesarecausingthehugetradesurplus,andtheappreciationofcurrencyaffectsmanyotheruncompetitiveindustriesinthecountry. Level Descriptors Marks L3 ● Analysisarecompleteandaccurate–focusingonthenegativeconsequencesofbothBOTdeficitandsurplus 8-10

● Tools of analysislikeadiagramiswell drawnandeffectivelyexplainedintheanswers● Answersprovidesomerelevantexamplesofcountries L2 ● Analysisareincompleteandcontainseveralinaccuracies● Toolsofanalysislikeadiagramisincompleteand/ornotusedintheexplanation. 5-7 L1 ● Generallyirrelevantanswer.● Severeconceptualmistakes.● Lackingeconomicanalysisandconcepts 1-4

(b) DiscussthepoliciestheSingaporegovernment canadopt tomaintainahealthybalanceof trade. [15] QuestionAnalysis Commandword “Discuss…thepolicies”● Start:PolicythatcanachievehealthyBOTposition● End:healthyBOTposition(tolinktosmallsurpluseitherbyraisingX-revenueorreducingM-expenditure)● Evaluation:limitationsofeachpolicyandwhichisbetter Concept ● UnpackhealthyBOT● PoliciestoachievehealthyBOT Context Singapore Introduction:AhealthyBOTtypicallyreferstoaslightBOTsurplusthatisnottoolargeorpersistent.Singaporetendstoberathersmallindomesticsizeandmarketgivenourpopulationandlandsize, wearereliant onexport growthandimportedresourcesforproduction. Thismeansthat toachieveBOThealthyposition, theSingaporegovernment hastoensureexport-competitivenessaswellascutdownimport-spending. Requirement 1:AssumingSingaporeisexperiencingaBOTdeficit,thegovernmentcanadopt an expenditure-switching policysuchasanexpansionarysupplysidepolicy toimprove exports’ competitiveness and hence, reducing the BOT deficit by increasingX-revenue.(Alsoaccept anypoliciesthat seektoenhanceX-competitiveness) TheSingaporegovernmentcan increase the number of signed Free-Trade Agreementswith other countries like Africa. The FTAs exp