2013 RI H1 Econs Prelims Suggested Answers H1 CPDD

1 Year 6 Preliminary_8819 [Turn over] © RI 2013 ECONOMICS Higher 1 (Syllabus 8819) Suggested Answer Outlines Year 6 Preliminary Examinations 2013

2 Year 6 Preliminary_8819 [Turn over] © RI 2013 Case Study Question 1: Education (a) (i) With reference to Tables 1 and 2, compare the government expenditure on education between Singapore and USA. [2] Both the Singapore and USA’s government expenditure per student on education as a percentage of GDP per capita increased from 2008 to 2010. [1m] However, the Spore government’s expenditure per primary student is co nsistently lower than that of USA OR the Singapore government’s expenditure per tertiary student is higher than that of USA [1m] Note: Though the examiners have accepted some significant differences which did not point to the difference in the expenditur e of primary versus tertiary education between the 2 countries, those are considered as second tier answers. The question made specific references to the 2 tables with data only on primary and tertiary expenditure of the 2 countries and it is fair to expec t Economics trained candidates to point out the relevant difference. (a) (ii) Explain 2 possible reasons for the difference observed in (a)(i). [4] Possible reasons (any 2): 1. The US govt may place a larger value on the external benefits of primary school education than the Spore govt. It may be of the opinion that primary school education has a greater impact on society than tertiary education. The US government thus spends more for each primary school student. [2m] 2. The US govt may find it more equitable to provide greater subsidy (per student) on a larger cohort of primary students as compared to a relatively smaller cohort of university graduates. The graduates are the ones who are likely to be able to command a higher wage and it may not be equitable to provide larger subsidy (per student) for this smaller group. [2m] 3. (Secondary point which examiners accepted - The cost of providing primary school education may be higher in USA than in Spore. In USA, class sizes are smaller and the primary school teachers are mainly graduates as compared to Spore.) (b) Explain the possible relationships between monthly wages and work experience. [4] Fig 1 shows that monthly wages and work experience are positively related in the earlier years of work of a worker. (1m for identification of relationship). As work experience increases, learning on the job increases and this will increase labour productivity. With higher output per worker, the demand for such workers will rise, ceteris paribus, and thus t hey are likely to be rewarded with higher wages. (explanation of relationship 1m) Figure 1 also shows that the wages of workers with only primary school education decline after 30 years of work experience. (1m for identification of negative relationship). Their value -add to productivity tend to taper off and decline. Such workers are low -skilled and work is mainly manual. As physical activity declines with the workers’ age, so will their productivity, that is, the monthly wages fall as their years of work increase beyond 30 years. (Explanation of negative relationship 1m) (c) To what extent does an increase in education levels improve the standard of livin g in an economy? [8] SOL refers to the welfare level of the average person in an economy. It encompasses both the material and the non -material aspects. Material SOL can be measured by real GDP per capita while non-material SOL is measured in terms of healthcare & education standards, stress level, externalities, etc.

3 Year 6 Preliminary_8819 [Turn over] © RI 2013 Thesis: Higher education levels lead to higher SOL  Higher education → skills level ↑→quality of labour force↑ → potential EG↑  With rising demand for a country’s goods & services → AD↑ → actual EG↑ → real GDP per capita↑, ceteris paribus→ material SOL↑  With higher GDP, governme nt tax revenue↑ →GE on healthcare, education, etc.↑ →non - material SOL↑ An increase in education level implies a greater level of skills acquired or at least a greater ability to acquire new skills because of higher levels of numeracy and literacy. This is likely to lead to greater labour productivity and that means greater employability and higher pay (refer Fig 1). Employment level is likely to rise, leading to greater economic growth and higher national income per capita. Ability to buy goods and services increases and thus the material aspect of SOL increases. Also, the non - material aspect of SOL may improve due to reduced deviant behaviour and lower crime rates. Anti-thesis: Higher education levels may not lead to higher SOL If higher education levels do not lead to economic growth and real GDP per capita does not increase, SOL will not rise. As shown in Extract 3, many American university graduates are unemployed, with unemployment standing at 8%. The 8% unemployment rate of graduates is close to that of the overall unemployment rate of 8.1 to 7.5%. It is likely that there is weak economic growth in USA during that period and therefore reduced job creation. Recruitment is low and fresh graduates have difficulty getting employment especially if their ex pectation of pay is relatively higher than non -graduates. Therefore education level does not necessarily mean greater employability over a lower education school leaver if the economy is weak. High unemployment → stress levels & crime rates↑ → non-material SOL↓ In the US, higher education increases the supply of skills that are not required by industry, the rate of unemployed graduates↑ (Extract 1). In the course of choosing fields of studies which do not align with the manpower needs of the nation, gra duates have difficulty looking for employment in the relevant fields. On the whole, higher level of education does not guarantee employment in the economy and therefore does not ensure a higher SOL for the average person. Conclusion/Evaluation: So higher levels of education of residents do not necessarily lead to increases in a country’s GDP. It must be coupled with greater job opportunities in an economy so that SOL may rise. Also, if the Gini coefficient increase, income gap widens, the average person in the economy may not be better off. Level Descriptors Marks L1 A theoretical regurgitation of SOL with no reference to case study at all. Answer that is one-sided EITHER on how education does or does not lead to improvement in SOL. 1-3 L2 Answer shows balance and sufficient breadth in the discussion of how education may increase SOL. Points are somewhat developed with reference to case study evidence. 4-6 L3 Points are well-developed with strong use of case study material. Answer must show awareness that material SOL is measured by real GDP/capita and must make macro-economic links to employment and AD/AS framework. Answer must include both material aspect and non-material aspect (at least a mention) of SOL. 7-8

4 Year 6 Preliminary_8819 [Turn over] © RI 2013 (d) (i) Explain the term positive externality. [2] Positive externality is generated when some of the benefits associated with the production or consumption of a good ‘spills over’ to third parties, that is, to parties other than the immediate buyer or seller (1m for definition) . For example, when one receives education, he will benefit in terms of job satisfaction and higher wage earned. However, there is also the external benefit to society when he is also likely to contribute to a greater productivity rate in the economy and t his helps to increase investments (in