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 m