HCI TYS 2007 to 2019 Answers

Page 1 of 8 Nov 2007 Case Study Q1 (a) (i) Describe the trend in the government budget balance in China between 2003 and 2006. [2] Budget in deficit [1m] but deficit is declining [1m]. Note: Comments such as ‘the budget is negative and rising at a decreasing rate’ were awarded no marks by Cambridge because the negative sign was given in the data and simply stating this did not suggest that the candidate had any grasp of the significance of the figures in any economics sense. (ii) Compare this trend with the changes in the Russian government’s budget balance in the same period. [2] Russia’s budget, in contrast, was in surplus [1m]. Budget surplus was also declining [1m]. (b) (i) What is the difference between real GDP growth and nominal GDP growth? [1] Real GDP growth is the percentage change in real output whereby the effects of price changes have been removed, while nominal GDP growth includes changes in real output and prices. (ii) Identify the economy which is projected to have the highest growth in nominal GDP in 2006. [1] Russia. Note: It is not China – to get approximation of nominal growth, a simple math is to add growth in real GDP and rate of inflation. (c) With reference to the data where appropriate, explain the factors that might cause the projected changes in Brazil’s current account balance shown in Table 2. [6] Identify that current account surplus for Brazil projected to decline. Possible reason 1a – Appreciation of Brazilian real ↑M & ↓X  This would cause exports to be relatively more expensive in foreign currency and imports to be relatively cheaper in domestic currency.  Using PEDx & PEDm, e xplain why BOT would fall, accounting for the decline in current account surplus. OR (Similar but different perspective) Possible reason 1b – Depreciation of Chinese Yuan  This would make Brazil’s exports less price competitive. This is especially important as much of Brazil’s exports go to China. The Chinese consumers may switch to domestic products instead.  Also, Chinese imports would now be relatively cheaper for the Brazilians.  Assuming ML condition holds, BOT would fall, accounting for the decline in current account surplus. Possible reason 2 – Rise in incomes of Brazilians + Industralisation - ↑M  Increase affluence of Brazilians would cause them to purchase more consumer imports from the rest of the world. DD for such goods is income -elastic as they are believed to be of better quality and the rate of satisfaction is higher.  Increase in investments could also cause the increase in imports of capital good to aid in production.  Increases in imports could account for the fall in current account balance surplus. Possible reason 3 – Relatively (important to mention is the relative rather than absolute) higher inflation rates in Brazil compared to China  The higher inflation rate in Brazil makes goods & services relatively more expensive for the Chinese consumers. It also makes Chinese goods relatively cheaper than domestic products for the Brazilian consumers.  Explain why BOT would fall, accounting for the decline in current account surplus. Note: According to Cambridge, one well explained factor can score up to 3m.

Page 2 of 8 (d) Discuss whether the data provided are sufficient to assess changes in the standard of living in these economies over the period. [8] Introduction  Define Standard of living.  I will be discussing whether the data provided are sufficient to assess changes in the standard of living in these economies over the period. Body Material SOL 1. Real GDP growth  Indication of SOL through real GDP growth as increasing real output is a good indication that entire country’s SOL is improving as more real output is produced implies more output is available for consumption.  However, insufficient to just base it on real GDP growth figures – need to take into consideration population growth as well which is not given in the data.  Real GDP per capita is a better indicator for whether the SOL of the average person in the country has increased.  This is especially true for countries such as Br azil, where population growth may be higher than real GDP growth, reducing SOL of the average Brazilian. 2. Inflation rates  Indicates that those whose nominal income does not increase together with inflation are worse off than others, meaning that SOL of average person may not have increased.  Russia has the highest inflation rates , double -digit figures for the entire period. It indicates higher cost of living over time and a fall in purchasing power. It may also indicate instability in the economy. 3. Income disparity; Gini coefficient  Overall growth in the economy does not indicate who benefits the most from the growth.  Higher economic growth, especially in the case of China, may benefit those in the urban areas of Beijing and Shanghai.  Those in the rural area may not benefit as much, leading to greater income disparity.  This would not indicate that SOL of the average person has increased. 4. Composition of GDP  It is not clear what has contributed most to the GDP growth registered.  Much of Russia’s growth could have been due to high exports of raw material such as hydocarbons and metals which does not contribute to an increase in SOL in terms of more consumer goods and service. Though ultimately, people working in such export markets will probably experience a rise in income. Non-material SOL 1. Effects of industrialisation  Although industrialisation leads to higher growth, it may be at the expense of higher pollution levels as in the case of China.  If the industrialisation also leads to higher stress levels for the people in China, living standards would be significantly lower for the average person. 2. Amount of leisure time  The higher level of GDP may come about due to a rise in average working hours, which would lead to lower living standards due to the higher stress levels and reduced leisure time. Conclusion To better assess the SOL of the economies, more data such as population growth, the composition of GDP and Gini coefficient should be provided. Some non-material indicators will also be useful.

Page 3 of 8 (e) Discuss and compare the likely impact of an unexpected decline in world economic activity on any two of these economies. [10] Introduction  Clarify that an unexpected decli ne in world economic activity is an unanticipated fall in global demand for exports and FDI.  I shall be discussing and comparing the likely impact of an unexpected decline in world economic activity on China’s and Brazil’s (State your choice of any two economies) macroeconomic goals of economic growth, low unemployment, low inflation and healthy balance of payment. Body  Exports of countries may fall, due to the lack of demand from the rest of the world.  Extent of fall in demand for exports depends on the YED value of the goods sold - China may see a less than proportionate fall in expor ts as its demand is rather income inelastic (textiles, low-end manufacturing goods). - While demand for Brazil’s exports (such as high quality coffee beans) is income elastic, indicating that exports may fall more significantly.  With a fall in world economic activity, inflow of FDIs to both countries may be decreased.  Extent of decrease depends on the attractiveness of the economies to the global investors. It also depends on the business expectations of the investors. - China may see a smaller fall in FDIs compared to Brazil, considering its robust domestic economy which may continue to propel growth for China. Effect on macro indicators for China & Brazil 1. National income  With a fall in I and X, national incomes in both countries will fall via the multiplier process. - Use the Y=AE or AD/AS