ACJC H2 Prelim 2024 P2 EQ6 Solutions

Q6.“Nowadays,onecountrycannotgoalone.Thisisaglobalvillage.Someproblemsmayremain,butitcanbesolvedamicablyandbilaterally,throughdiscussion.”Source:Bangladesh’sPrimeMinisterSheikhHasina,WorldEconomicForum,2019 (a)Explainhowtheimpositionoftariffsmightreduceoneformofunemploymentwhileincreasinganother.[10] IntroductionTariffsisatypeoftradeprotectionmeasure,whichisataxonimportedgoodorservicetorestrictimports.Theimpositionoftariffsmayaffectunemploymentrate–andunemploymentreferstoasituationwherepeopleofworkingagewhoareseekingforworkbutcannotfindone(i.e.,withoutajob)R1: Toexplainhowtheimpositionof tariffsmight reducestructural unemploymentConsiderthesteelmarketinUS,withfreetrade,theworldsupply,Swdeterminestheworldprice,Pw.AtPw,thedomesticquantitysuppliedofsteelwasatQ1whilethedomesticquantitydemandedofsteelwasatQ2.TheamountofsteelimportswasQ2–Q1.Diagram1 In2018,theUSgovernmentaccusedsomecountrieslikeChinaandMexicoforunfairtradepracticeswhichhavehurttheirdomesticproducers.TheUSgovernmentimposedtariffsonsomegoodslikesteelimports.Withthetariffs,theworldsupplyofsteeldecreasefromSwtoSw+t.ThisincreasesthedomesticquantitysuppliedfromQ1toQ3,whilethedomesticquantitydemandeddecreasesfromQ2toQ4.Theamountofsteelimportsdecreasesfrom(Q2–Q1)to(Q4–Q3).

Sincethedomesticquantitysuppliedofsteelincreases,thesteelproducingfirmsinUSincreasedemandforfactorsofproductionsuchaslabour.ThiscreatesmorejobsforthesteelworkersinUS,hencereducingstructuralunemployment,aspreviouslytheinfluxofcheapimportsmayhavereducedthedomesticproductionofsteelinUS,whichresultedinlayoffsandthesteelworkerswerenotabletofindjobsinothersectorsduetoamismatchofskills.Hencetheimpositionoftariffsonsteelimportsmayhelpreducestructuralunemployment.R2: toexplainhowtheimpositionof tariffsmayincreasedemanddeficientunemployment duetobeggar-thy-neighbour effect or retaliationbytradingpartnersTheimpositionoftariffsmaycausedemanddeficientunemploymentasADmayfallinthelongterm.Thismightbeduetobeggar-thy-neighboureffectorretaliationbytradingpartners.WhenUSimposestariffsonimportedgoodsandalleviatesitsowneconomicproblem,itworsenstheeconomicproblemsofitstradingpartners.ThetradingpartnersofUSwillexperienceadeclineinexportsalesandhenceexportrevenue(X),andespeciallyifUSisakeyexportmarket.Assumingimportexpenditure(M)isconstant,netexports(X-M)ofUStradingpartnersmaydecreasesignificantly,reducingAD.ThismaycauseaslowdownorcontractionoftheeconomiesofUS’tradingpartners.Withthefallingincomesofforeignhouseholds,thedemandforUSexportsfall,assumingUS’exportsarenormalgoods.Xdecreases.Furthermore,shouldtradingpartnersstarttoretaliateandimposeretaliatorytariffsonUSgoods,US’XfallsfurtherAssumingMconstant,(X-M)decreases.US’ADdecreases,asillustratedbyaleftwardshiftofADcurvefromAD0toAD1.Diagram2: ThefallinADwillcausefirms’inventoriestorise,sofirmsreduceproductionofgoodsandservicesinthenextproductioncycle.RealGDPdecreasesfromY0toY1.Asfirmsdemandforlessfactorsofproductionsuchaslabour,unemploymentrateincreases.Theeconomyoperatesawayfromfullemploymentlevel,Yf.Implyingthatdemand-deficientunemployment

hasincreased.Thefallinautonomousspendingwillfurthercausemultipleroundsofreducedinducedspending,sinceone’smanspendingisanotherman’sincome.ADfallsfurther,causingfurthercontractionoftheeconomy.Asfirmsdemandforlessfactorsofproduction,unemploymentincreasesfurther.Hencetheimpositionoftariffsmayleadtohigherdemanddeficientunemployment. Knowledge, Application, Understanding, AnalysisL1 - DescriptiveresponsewithoutapplicationofeconomictoolssuchasDD-SS,andAD-AStoanalysehowimpositionoftariffsmayaffectdifferenttypesofunemployment.- Glaringconceptualerrors 1-4 L2 - Underdevelopedexplanationofbothrequirementsofhowimpositionoftariffsaffectsstructuralanddemand-deficientunemploymenteg:responsehasmissinglinkbetweenfallingADandincreasingunemployment,ordidnotexplainindetailhowtheimpositionoftariffswouldaffectthepriceandquantities- Developedbutone-sidedexplanationoneitheroftherequirements 5-7 L3 - Ananalyticalresponsewithoutgapsinexplanationonbothrequirements–includingtheanalysisofhowtariffsworkstoreduceimports,andmakingexplicitlinkstodifferenttypesofunemployment 8-10

(b)DiscusswhetherglobalizationwillhaveanoverallpositiveornegativeimpactonadevelopingcountrylikeBangladesh.[15]IntroductionGlobalisationisthegrowingeconomicinter-dependence(orinterconnectedness)ofcountries,throughincreasingvolumeandvarietyofcross-bordertransactions,ingoodsandservices(i.e.,trade),inflowsofcapital(bothshorttermcapitalandlong-termcapital),andinlabourmigration. Theincreasedinter-connectednessofcountrieswillaffectadevelopingcountrylikeBangladeshintermsofitsmacroeconomicperformance,aswellasitsstakeholderssuchasdomesticproducers(intermsofproducersurplus),domesticconsumers(intermsofchoice,andconsumersurplus) R1: Toexplainthepositiveimpactsof globalisationonadevelopingcountry Possiblemacroeffects Withtheincreasedinterconnectednessofcountriesintermsoftradeflows,therewillbegreateraccesstolargerandmoreaffluentexportmarketssuchasUSandEUsincemembercountriesinafreetradeagreementwouldreduceoreliminatetradebarrierssuchastariffsonBangladesh’sexports.ThedemandforBangladesh’sexportsincreases,increasingexportrevenue(X),assumingimportexpenditure(M)constant,netexports(X-M)increasesandADincreases. Inaddition,withtheincreasedinterconnectednessofcountriesintermsofcapitalflows,possiblyduetonegotiationandrectificationofnewfreetradeagreementswherebarrierstoinvestmentsareremovedsuchasregulationsandred-tape,hencegreaterinwardforeigndirectinvestments.Foreignfirms(MNCs)builduptheirproductionfacilitiesandacquiremorecapitalgoodssuchasmachinesandbuilding,henceinvestmentexpenditure(I)increases,resultinginanincreaseinADDiagram3:

TheincreaseinADisillustratedbyarightwardshiftofADcurvefromAD0toAD1.Therewillbeanunplanneddecreaseinfirms’inventories,sofirmsincreaseproductionofgoodsandservices. RealGDPincreasesfromY0toY1,contributingtoactualgrowth,assumingthatthereissparecapacityintheeconomy,whereinitialADcurvecutsAScurveatKeynesianrange.Asfirmsdemandformorefactorsofproduction,demand-deficientunemploymentdecreases.Theriseinautonomousspending(fromY0toY1)willstimulatemultipleroundsofinducedspending,becausetheriseinproductionduetotheriseinautonomousspendingwillresultinfirmsdemandingformorefactorsofproduction,andwithmoreincomespaidtohouseholds,purchasingpowerincreaseswhichincludesinducedspending,therewillbemultipleroundsofinducedspendingandthiswillendwhensumofwithdrawals=initialinjectionsADincreasesfurtherfromAD1toAD2contributingtogreatergrowth(i.e.,realGDPincreasesfromY1toY2)andemployment.HenceglobalisationmayhelpBangladeshachieveinternalstability.EV:fordevelopingcountrieslikeBangladesh,wheretherearehighpovertyratesandincomeinequality,domesticdemandisunlikelytobeabletohelpdrivegrowthandemployment.Soglobalisationislikelytobringextensivebenefitstotheseeconomiesasexportswillbeanimportantdriverforgrowth.Also,sincethesecountriesusuallyhavealackofinfrastructures,theinwardFDIswouldlikelyhelpdevelopnecessaryinfrastructuressuchasroadsinthecountry,andtheytendtobringwiththemtechnicalandmanagerialexpertiseaswellasnewproductiontechnologieswhicharetransferredtothelocalworkforce,whichhelpscontributetoastrongermacroeconomicperformance.Note: Examinersshouldbeawarethat candidatesmaytakeadifferent approachwhich, ifappropriate, shouldberewarded. Other possiblemacrobenefitsmayinclude: improvementinBOTduetoincreaseX, sustainedgrowthduetoinwardFDI. Microeffect Globalisationmayalsoleadtolowerpricesforconsumers,andthismayhelpimproveconsumersurplusandhenceconsumerwelfare.

Withglobalisationwherethereisincreasedinterconnectednessofcountriesintermsoftradeflows,Singaporecanimportmoregoodsandservicesfromoverseasastradebarrierswilllikelyberemovedorreduced Withreferencetothediagraminpart(a),assuminginitiallyBangladeshimposestariffsonimports,withfreetradei.e., theremovaloftariffs,worldsupplyincreasesfromSw+ttoSw,decreasingworldpricefromPw+ttoPw(i.e.,consumersinBangladeshwillbeabletoenjoyproductsatlowerprices,becauseBangladeshwillbeabletoimportgoodsfromcountrieswithcomparativeadvant