2013_YJC_H1_Econs_Q2 Case Study Answers

1     H2 Economics Paper 1 Question 2 Marking Scheme (a) (i) What economic relationship exists between investment and economic growth? [2] • The higher the level of investment spending, the higher the rate of economic growth • With higher investment, it stimulates increases in both actual growth in the short run and potential growth in the long run, enabling sustained increases in real national output over time. (ii) How far is the relationship supported by data shown in table 1? [3] • Table 1 show that economies generally with larger shares of investment in terms of GDP growth contributions experienced higher average annual GDP growth rates, and vice-versa. For example China and India. However, India’s high growth could not be attributed to investment alone. Its relatively high domestic consumption was also a contributing factor to its high growth. Similarly, although Korea and Thailand had low investment, they experienced relatively high GDP high growth. • This could be attributed to the growth model adopted by the various countries. Growth of a country could be driven by any components of aggregate demand. Korea’s GDP growth was led by exports and domestic consumption while growth in Thailand and US were driven more by domestic consumption. (b) Explain how the revaluation of the yuan would reduce the trade imbalances between the US and China. [2] • With the revaluation, Chinese exports will be more expensive in USD while imports from US will be cheaper in yuan • Quantity demanded for Chinese exports will fall while quantity demanded for imports from US will increase • If the Marshall-Lerner’s condition is met, where the sum of price elasticities of demand for exports and imports is greater than 1, size of China’s trade surplus with US will fall. (c)(i) State one possible factor that determine the impact on national income of an increase in domestic consumption in China [1] • Size of multiplier, or • Size of increase in C, or • Share of domestic consumption in GDP (ii) Explain why the growth model of countries like China, which is dependent on investment and exports, is ‘unsustainable’. [4] • Dependence on exports means that these countries’ economic performance is inevitably tied to the performance of their major trading partners. With a persistent trade deficit and slow growth in US and Europe, it is unlikely the growth model powered by exporting to these countries is sustainable. The trade imbalance between developed and emerging countries will be a threat to global growth and hence it is not possible for countries like China to continue depending on export-led growth.

2     • Government-led investment spending may be on wasteful and inefficient projects which do not contribute much towards long-term economic growth and employment growth (table 1). It could also have crowded out private investment spending in more efficient projects that may generate higher rates of economic g