PJC H1 ECONS P1 Q2

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 1 PJC 2017 H1 Prelim Exam Paper 1 Question 2: Economic Performance, Prospects and Lessons (a) Describe the change in China’s real GDP between 2011 and 2015 [2] Suggested answer : China’s real GDP increases at a decreasing rate between 2011 and 2015. (b) Extract 7 suggests an increase in China investment overseas. Comment on the likely effects of this on China’s balance of payments [4] Suggested answer : An increase in China investment overseas will lead to a deterioration of her capital account in the short run as this is recorded as a d ebit entry in the long run capital account. Ceteris paribus, her BOP will deteriorate. However, in the long run her balance of payment may improve as investment overseas reap returns in the form of investment income such as profits and dividends. These are rem itted back to China and are recorded as credit entry in China’s Current account in her Balance of Payment. (c ) Explain the case for the use of protectionist measures by the EU government [4 ] Suggested answer : The argument advanced for protectionism is to save jobs as dumping of cheap stainless steel product has “put thousands of jobs at stake’ in the EU stainless steel industry. With China dumping cheap stainless steel in the EU marke t below cost, many EU firms are forced to sell at ‘below cost price’ as they cannot compete with cheap China made stainless steel. As a result, many were force to cu t back production and hence employment. To prevent such massive job losses, governments hav e resorted to protectionism such as imposition of tariff so that imported stainless steel products are more expensive and EU stainless steel producers can still sell their p roducts and hence prevent job losses. This will allow an increase in demand for domestic produce stainless steel and reduce demand for imported stainless steel. When demand ri ses, there will be an increase in production and hence a rise in derived demand for l abor, hence preventing further job losses. In this way jobs may be saved. (d ) With reference to Extract 7, using AD/AS analysis, explain how the ‘Belt-and-Road Initiative’ impact the Chinese economy. [4] Suggested answer : The ‘Belt-and-Road Initiative’ is an infrastructure development plan proposed to improve the connectivity of the country. As this project is undertaken by the Chinese government, it represents an increase in G and hence an increas e in AD of which G is a component. Through the multiplier process, this will bring abo ut an increase in actual growth in the short run as seen in the increase in real GDP. As r eal GDP increase, firms hire more labour to produce more output. This improve the employment of the economy as well. In the long run, an improvement in infrastructure incr ease connectivity and efficiency. Better infrastructure leads to time save on the roa d and allows time for productive activity. This increases workers productivity and a fall in per unit cost represented by an outward shift of the LRAS. This will result in a fa ll in GPL and an increase in long run economic growth. The fall in GPL may also help impr ove her BOP as this enhances her exports competitiveness.

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 2 (e) Discuss whether the data provided are sufficien t to assess changes in standard of living of China over the period of 2011 and 2015. [8] Suggested answer : Define SOL Standard of living of a country refers to the socia l and economic well-being of a country which includes both the material and non-material a spects of life. The material well- being is determined by the quantity and quality of goods and services for consumption while the non-material well-being is the quality of life and environment which ones lives determined by the intangible factors such amount of leisure and life expectancy. Real GDP is the total money value of final output p roduced within the geographical boundary of the country, regardless of ownership of factors of production, over one year and before adjustment for depreciation excluding th e effect of inflation. The real positive GDP growth data shows that the level of real GDP ro se during the period. This means that there are more goods and services produced in the economy. Assuming that the population size rises marginally, real GDP per capi ta implies that on average citizens have more goods and services available for consumpt ion. A higher level of good and services led to an increase in demand for labour, r esulting in an increase in wages. A higher wage means Chinese households was earning hi gher income and disposable income and they had higher purchasing power to buy more and better quality goods and services. If the increase in real GDP is due to longer working hours of workers, this meant that the Chinese had less leisure time and rest. This could lead to a declining health condition and an increase in stress level. As a result, the w orkers could have experienced a fall in a quality of life. Hence, we need to know whether t here is an increase in working hours to determine whether the workers could have experienced a fall in a quality of life. Unemployment rate measures the % of the labour forc e who is willing and able to work but cannot find a job despite an active search. An increase in unemployment rate from 4.3 to 4.6. A rise in unemployment rate could be du e to China’s transition from export led model of growth to a consumption and innovation driven one which could cause structural unemployment as workers do not have the necessary skills required in the labour market. With a rise in unemployment, it woul d lead to lower wages and hence lower ability to consume and lower material SOL. Ho wever, given that unemployment rose marginally by 0.3, it had minimal effect on th e standard of living in China as the improvement in the standard of living due to the hi gh real GDP growth in the same period outweighed the effects of unemployment on the standard of living. PM2.5 air pollution represents the atmospheric particulate matter that have diameter less than 2.5micrometers which is the air quality report from environmental authorities. PM2.5 air pollution has increased. This could imply that the quality of air had dropped due to a greater amount of pollutants in the environment. Thus, we could expect an increase in health problems such as respiratory problems which reduced the quality of life of individuals staying in China. Given data is necessary but not sufficient to asses s how China’s average SOL has changed over time. There is a lack of information t o indicate the change in the both material and non-material well-being. E.g. the high er growth may bring about greater pollution and less leisure. Thus, a higher real GDP may not necessarily lead to higher SOL if people’s health is affected by pollution and greater stress. To have better assessment of SOL, more indicators such as PSI, lit eracy rate and working hours are required. Composite index such as measure of economic welfare (MEW) could be given to indicate change in material and non-material SOL . MEW adds to GDP intangibles such as leisure and services of public amenities wh ich will increase the non-material

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 3 well-being and deducts negative externalities such as pollution which will reduce the non-material well-being. Thus, it is a better indicator for assessing changing of SOL. (f) In view of the anti-globalisation sentiments, d iscuss whether globalisation should be the driver of growth for emerging economies such as China. [8] Suggested answer : Claim: Globalisation should be the driver of growth for emerging economies such as China. Globalisation is the greater integration of the glo bal economies