2012 J2 H1 Prelim Exam Question Paper

JURONG JUNIOR COLLEGE PRELIMINARY EXAMINATIONS 2012 8819/01 ECONOMICS Higher 1 30 August 2012 3 hours READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. JJC Economics This document consists of 8 printed pages. [Turn over

© Jurong Junior College 2012 (H1) 2 Section A Answer all questions. Question 1 Metal Minerals Extract 1: Consumerism drive demand for metals Rising consumerism in affluent cities especially in the deve loping economies of China, India, and Vietnam has spurred an increase in consumption of consume r products such as electronics and smartphones over the years. The final end user, the consumer has caused thousands of tons of materials such as metals and rare earth metals to be extracted from the ground to feed the needs of industries. Also electromagnets made from rare earth metals such as Beryllium, Cobalt and Fluorspar are used in everything from the motors that power hybrid vehicles and electric windows to windmills, computers and hundreds of consumer goods that touch our lives every day. Despite the strong demand for metals, world’s supply cannot expand fast enough to keep up with the demand. When orders increase, new supply takes up to a year to be adeq uate and when orders decline producers a re unwilling to shut production down. It’s not like mining companies can just flip a switch; it takes time to make mine sites suitable for extracting metal. Production remains constrained and there's been an underinv estment in extraction technology and capacity. Thankfully the global economic downturn has eased the pressure on these commodities and allowed production output to catch up with the orders. This gave governments some breathing space and time to bring infla tion down briefly for their economies. Source: Popular Science New Technology, Oct 2011 and Canadian press, May 2011 Figure 1 Source: www.kitco.com

3 © Jurong Junior College 2012 (H1) [Turn over Extract 2: Chinese embargo of rare earth metals Extraction and mining activities and production are often associated with severe environmental damage. The environmental problems include air emissions with harmful elements, such as fluorine and sulphur, wastewater that contains excessive acid and radioactive materials too. Although China only has 30% of global rare earth metals deposits, it accounts for 95% of total world production. Thus China has a monopoly on the global production of rare earth metals and they sought to tighten their grip on exports by eliminating all export sales to its major buyers, the US, Japan , and Europe from October to November 2011. The Chinese government c ited mainly environmental reasons for restricting the production and exports of rare earth metals. The US, Europe and Japan have filed complaints to the World Trade Organisa tion (WTO) against this embargo. The US claims the embargo will raise their cost unnecessarily for a very wide range of industries ranging from consumer based to telecommunications and even precision weaponry. The US government will be the hardest hit as r are metals is an important input in the manufacture of smart bombs and missiles. Unlike consumer durables, the US government can only purchase weapons from US firms for strategic reasons. Source: Popular Science New Technology, July 2011 and Bloomberg News, March 2010 Extract 3: UK inflation rate rises to 4% in January 2011 The UK Consumer Prices Index (CPI) annual inflation rate rose to 4% in January, up from 3.7% in December, as the effects of the value -added tax (VAT) rise on goods and services implemented in January were felt. Higher oil prices also meant inflation remained well above the 2% target. The CPI measure has now been one percentage point or more above target for 14 months. Bank of England governor Mervyn King has now written to the gov ernment, after sending three such letters last year, explaining the outlook for inflation and what will be done to tackle it. In his letter he says inflation is likely to rise towards 5% in the coming months. Mr. King said the rise in inflation was due to the VAT rise, the past weakness of the pound and recent rises in commodity prices. Source: BBC News, 15 February 2011 Extract 4: Trade war escalating The US announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China. This is in response to accusations that Chinese authorities have been providing cheap credit and excessive subsidies to the solar panel industry. The subsidies will allow Chinese firms to undercut and export cheap solar panel products which will ‘fo rce’ foreign firms out of business. However, f or US companies that purchase solar panels, this trade dispute threatens thousands of American jobs. Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that in expensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. Many of these jobs depend on affordably priced solar panels, and companies would have to lay off workers if panel prices rose as a result of this tariff. Estimates are that a tariff will effectively shut the

© Jurong Junior College 2012 (H1) 4 majority of Chinese imports out of the US and result in job losses of 15,000 to 50,000, even accounting for production gains in the US solar panel industry. Opponents of the tariffs also say that the US benefits from cheap Chinese production. They point out that Chinese companies often turn to American companies to buy the factory equipment and polysilicon they need to make solar panels. Now Chinese companies would “certainly” retaliate by filing a trade case at China’s commerce ministry accusing big American chemical companies of dumping. The priority now is to keep cost low and expand the usage of solar power as a source of energy in US. Some 93,500 Americans are employed in the US solar industry in 2011, and more than half of the country’s solar companies are planning to expand hiring in 2012. Source: Greentech Media, January 2012 and New York Times, May 2012 Questions (a) (i) Describe the trend in Base Metal prices between March 2009 and December 2011. [2] (ii) Explain possible reasons for the trend above. [4] (b) Using the concept of price elasticity of demand, analyse how a cut in export sales of rare earth metals by China affects the total revenue of consumer -based and precision weaponry firms in US. [6] (c) Explain why the restrictions on the production of rare earth metals by China can be justified on grounds of efficiency. [4] (d) With reference to Extract 3, comment whether rising inflation in UK is due to rising commodity prices. [6] (e) Discuss the economic case for US in imposing protectionist measures on Chinese solar panels. [8] [Total: 30 marks]

5 © Jurong Junior College 2012 (H1) [Turn over Question 2 Eurozone’s woes and its Global effects Extract 5: Singapore can cope with rising inflationary pressures