2013_NYJC_H1_Econs_Q2_Suggested_Answers

1 2013 H1 Prelim CSQ 2 Suggested Answers Extract 4: Slowing down of the BRIC Brazil, Russia, India and China, was acronymed into the BRIC in 2001 by Jim O’Neill, an investment banker from Goldman Sachs. In 2007 China’s economy expanded by an eye- popping 14.2%. India managed 10.1% growth, Russia 8.5%, and Brazil 6.1%. The IMF now reckons China will grow by just 7.8% in 2013, India by 5.6%, and Russia and Brazil by 2.5%. So, what is ailing the BRIC and other emerging markets? Firstly, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the eurozone, near- recession in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United States were always likely to affect emerging-market performance negatively – via trade, financial links, and investor confidence. Secondly, and most recent, factor is the US Federal Reserve's signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates. The era of cheap or zero-interest money that led to a wall of liquidity chasing high yields and assets – equities, bonds, currencies, and commodities – in emerging markets is drawing to a close. These countries share other weaknesses as well: excessive fiscal deficits, external deficits, above-target inflation, and stability risk (reflected not only in the recent political turmoil in Brazil but also in India's political and electoral uncertainties). Thus, emerging economies with large twin deficits and other macroeconomic fragilities may experience further downward pressure on their growth rates. Adapted from various sources Indicator – (%) Brazil Russia India China Real GDP Growth 2.7 4.3 7.2 9.2 Inflation 6.6 8.4 8.6 5.4 Unemployment 6.0 6.5 9.8 4.0 Investment/GDP 20.6 23.2 34.4 48.3 Saving/GDP 18.4 28.6 31.6 51.0 Current Account/GDP -2.1 5.5 -2.8 2.8 Budget Balance /GDP -2.6 1.6 -8.7 -1.2 Table 1: BRIC’s in 2011 Source: The Economist, 29th September 2012

2 Extract 5: Rupee fall may have triggered inflation, but it also offers a way out of industrial decline Every dark cloud has a silver lining. Nowhere is this saying more apt than in the case of the falling rupee. It has raised fears of a spike in already high inflation rates and decline in foreign investment flows. But it has simultaneously opened up new possibilities of boosting exports, making India's economy more competitive and aiding a manufacturing revolution. The opportunity offered by the rupee depreciation can be substantial, given that labour costs in China have risen sharply. Current trends have already made India the cheapest source of auto components. Important industries that can leverage these trends includ