AJC_H1_ECONS_Answers

2017 H1 Economics Preliminary Exams – Suggested Answers Anderson Junior College Economics Department Page 1 CSQ Question 1 (a) Using data from Table 1, (i) Compare the balance of trade position of UK, China and Singapore. China and Singapore’s balance of trade were in surplus while UK’s balance of trade was in deficit. [1m] Balance of trade surplus (as a % of GDP) for Singapore was larger than for China. [1m] [2] (ii) Comment on the view that the Chinese economy performed well in 2015. Table 1 shows that China recorded real GDP growth rate of 5.5% in 2015, indicating that it experienced economic growth and increase in real national income. Inflation rate was low at 1.4%, indicating price stability. China recorded balance of trade surplus, which could i ndicate a favourable posi tion on the balance of payments (assuming KFA account and other components of current account is already in a surplus) [Any 2 of the above] However, there is no information in Table 1 on unemployment and therefore no indication of the level of employment and efficiency in the usage of labour resource. There is also no information on the capital and financial account balance and therefore no information on overall balance of payments position. [Any 1 of the above] [3] (b) Using data from Extract 1 and Table 2, explain and compare how “weaker household spending and worries about the global outlook” in the UK may impact the balance of trade for China and Singapore. Weaker household spending means a fall in consumption expenditure. Worries about the global outlook could lead to lowe r confidence in the economy for households and firms and this would result in fall in consumption and investment spending. Aggregate demand falls as consumption and investment spending are components of AD. The fall in AD leads to a fall in production levels and decline in national income in the UK. [1m] As income falls, UK’s demand for exports from its trading partners, including exports from China and Singapore also fall. [1m] From Table 2, China is UK’s 3rd largest import partner while Singapore ranks 27th. [1m] This means that China exports more of its goods and services to UK than Singapore does and thus would suffer a larger fall in exports revenue, affecting its balance of trade more than the case for Singapore. [1m] [4] (c) i Explain what is meant by a budget deficit. A budget deficit occurs when government expenditure is larger than the tax revenue it collects. [1] (ii) Using the concept of the circular flow of income, explain how “expanding its budget deficit” will affect the equilibrium level of national income. The circular flow of income refers to an economic model which describes the flow of payments and receipts b etween domestic firms and domestic households. Income flows from firms to households in the form of factor payments, and back again from households to firms as consumer e