TPJC H1 ECONS CSQ2 ANS

H1 CSQ 2 Suggested Answers (a) Using the data in Table 1, (i) Describe the trend in real Gross Domestic Product for Singapore from 2013 to 2016. [1] Real Gross Domestic Product for Singapore increase from 2013 to 2016. [1] (ii) Identify the year where General Price Level was the highest. [1] General Price Level was the highest in 2014. [1] (b) What conclusion would you draw about the overall ec onomic performance of Singapore in 2016 compared with 2013? [4] Comparing between 2013 and 2016, Singapore’s real GDP growth fell from 2.6% to 2.5%. This implies that its real GDP is inc reasing at a decreasing rate and its unemployment rate rose from 1.9% to 2. 1%. The increase in unemployment reflects an increase in unutilised resources in the economy. Since GDP measures the total value of final goods a nd services produced within the geographical boundary of a country in a given year. A fall in Singapore’s real GDP growth rate reflects a slower growth and this is supported by a -2.5% growth in its gross fixed capi tal formation. This signifies a fall in the level of investment in the country which is detrimental to the economy both in the short and long run. Alth ough there is an improvement in the Balance of Trade in 2016 as comp ared to 2013, we have insufficient information to conclude on the overall Balance of Payment account of the country. Hence, the overall economic performance of Singapore deteriorated in 2016 compared to 2013. [1] Any 3 indicators – 3m State the conclusion – 1m (c) Using elasticity concepts, analyse the incidence of agricultural subsidy on producers and consumers of grain. [4] From Extract 6, Para 2 “Separately the government p ledged increased agricultural subsidies…set aside 14 billion yuan (U S$2.26 billion) in subsidies to grain farmers” Lower cost of producing grain Supply curve shifts to the right a fall in equilibrium price and increase in equilibrium quantity. [1] Concept of price elasticity of demand and supply can be used to determine the incidence of subsidy that is experienced by the producer and consumer of final goods and services. Demand for grain tends to be price inelastic due to grain being a staple in Asian country like China. Hence, degree of necessity is high. [1]

Use diagram to illustrate the incidence of subsidy on consumers and producers of grain Since PED for grain is more price inelastic than PES for grain [1] Where demand for grain, which is a necessity for Ch ina (since most Asian consume rice as a staple) are highly price inelastic, a fall in price leads to a less than proportionate increase in quantity demand ed by consumers. As consumers are relatively less responsive to price c hanges than producers, producers can more easily pass on the fall in cost of production to consumers. As a result, the consumers would bear a greater proportion of the subsidy while producers bear a smaller proportion. Evaluation: [1] In conclusion, whether the incidence of agricultural subsidy will fall more on consumers or producer depend on the relative elasti city of demand and supply for grain. (d) (i) Using AD/AS analysis, explain how ‘surprise devalua tion of the yuan’ can reignite growth in China. [4] The aim of the Japanese government is to seek to bo ost economic growth which slowed to 7 percent in the first quarter of 2 015 as mentioned in Extract 6, Para 1. A ‘surprise devaluation of the yuan’ will cause Chi na’s exports to gain international competitiveness exports will become relatively cheaper in foreign currency Assume demand for exports to be price elastic, a decrease in the export prices will bring about a mo re than proportionate increase in quantity demanded for exports (X) resul ting in an increase in export revenue of China. [1] Locals will now find imports to be relatively deare r than before in local

currency Assume demand for imports to be price elastic and that imports and locally-produced goods are close substi tutes, there will be a more than proportionate fall in quantity demanded f or imports (M) resulting in a fall in import expenditure of China. [1] Assuming Marshall-Lerner condition holds where the sum of the price elasticity of demand for imports and exports is gre ater than one [E X + E M > 1] [1] increase in (X-M) increase in AD trigger the multiplier multiple expansion of production, output, employmen t & national income [1] (ii) Suggest a possible reason why this policy may have limited effectiveness. [2] As mentioned in Extract 7, Para 1 “traders feared t he move could also ignite a currency war” OR Extract 7, Para 2 “fear a prolonged currency war … US and Japan retaliate” [1] retaliation by China’s trading partner in the weakening of their currency hence, China’s e xports will seem relatively dearer in foreign currency to them leadi ng to a fall in demand for China’s export, c.p. AD ↓ limiting the effectiveness of the policy to reignite growth in China. [1] Any POSSIBLE reason may be accepted: [2] • Demand for exports and imports are price inelastic Demand for exports and imports may be price inelast ic in the short run. There are other determinants affecting locals’ deci sions to buy foreign goods and foreigners’ demand for a country’s export s (other than price considerations). For instance, it will take some time for consumers to switch their taste and preferences. In addition, it will also take time fo r trading contracts between firms to expire before they can respond to the change in exchange rate and switch trading partners. Thus the aggregate demand might not rise by the full extent. • Conflict with other macroeconomic goals Devaluation improves the country’s export competiti veness and helps to stimulate aggregate demand and economic growth. How ever this could be at the expense of demand-pull inflation especially if the economy has supply bottlenecks or is operating at full employme nt levels. Hence, policymakers in deciding the timing and extent of g rowth policies have to weigh the benefits of economic growth versus the co sts of higher inflation (demand-pull inflation). However, it must be noted that China is facing econ omic slowdown. Hence, unless the increase in AD is substantial eno ugh, China should not be hit with the problem of inflation. • Ceteris paribus assumption does not hold in real l ife Ceteris paribus assumption does not hold in the rea l world. There could be other external shocks or variables affecting the le vel of aggregate demand and the economy – which could cancel out the effect iveness of the implemented exchange rate policy. • Time lags

It takes time before the economic situation is full y recognised as time is needed to gather key economic statistics and data [recognition lag]. Central banks also need time to make decisions and implement the appropriate monetary policy [implementation lag]. There is also a time lag for the monetary policy to affect the economy and inflation [impact lag]. Owing to the time lag associated with the working o f monetary policy, the depreciation of exchange rate may take effect at a time when the economy may have already recovered from the economic recession, thus resulting in the economy overly expanding and facing inflationary pressures instead. • Uncertainty There is uncertainty to the extent and duration of the macroeconomic problem – recession – at hand. Governments do not h ave perfect information as to the degree and duration to weaken the exchange rate. (e) Analyse the effects of the TPP fallout and China’s slowdown on the Singapore economy. [6] Effects of TPP fallout on SG economy: • TPP was intended to be a multilateral FTA among a number of countries, aimed to create freer trade and investme nt flows among these countries increase (X-M) and increase I link to ac