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 expenditure on domestically produced goods and services (C d). This circular flow of inc ome can be increased by injections while reduced by withdrawals. Injections comprise investment (I), government expenditure (G) and expenditure on exports (X) while withdrawals comprise savings (S), taxes (T) and import expenditure (M). National income is [4]

2017 H1 Economics Preliminary Exams – Suggested Answers Anderson Junior College Economics Department Page 2 in equilibrium when planned injections are equal to planned withdrawals and there is no tendency for it to change. When the Chinese government ‘expands its budget deficit’, G will increase while T will decrease. This will result in injections exceedi ng withdrawals (J>W) [1m] which leads to a rise in national income as more goods and services are produced and more households are paid more factor income. With the increase in income, households not only increase their spending on domestic consumption, t hey also save more (S), pay more taxes (T) and buy more imports (M) , which increases withdrawals. [1m] There will be successive rounds of induced increase in national income, causing an increase domestic consumption, S, T and M until withdrawals have risen to equal the new level of injections in the economy. [1m] At that point, national income will stop rising and a new equilibrium is attained in the circular flow where there would be a multiplied increase in national income. [1m] (d) (i) Assess whether the “disruptive change” explained in Extract 3 is the most significant cause of unemployment in Singapore. Unemployment refers to the number of people who are actively looking for work but are currently without a job.  Define demand-deficient unemployment and structural unemployment. Perspective 1(Disruptive change is a significant cause of structural UnN)  Explain how “disruptive change” cause structural unemployment  technology changes and with no upgrading skills  demand for lower skilled workers fall while demand for higher skilled workers increase  Structural UnN due to mismatch of skills  Accept any point that reasonably argues that disruptive changes causes dd-def UnN Perspective 2a : Disruptive change may not cause S.UnN due to the presence of government policies (Skillsfuture) Perspective 2b(Other factor can also cause UnN)  Shifting trade flows (China moving to own sources of FOPs)  Loss of CA in re -export industries  Workers are retrenched and unable to find jobs in sunrise industries due to mismatch of skills  Structural UnN  “Lacklustre global growth” and “shifting trade flows”  Fall in DDx  reduce net exports and  demand deficient UnN  ‘Protracted oil price slump’ could also be a cause of workers in the shipping and marine industry lose their jobs and may not have the skills to take on jobs in other growing sectors  Structural. UnN Evaluation  Whether or not disruptive change is the most significant cause of UnN in Singapore depends on how SG government deals with these changes. Nonetheless, in the short run, it is still likely to be a significant cause of S.UnN as the labour force needs time to be trained to adapt to these challenges.  In long run, disruptive change can also create employment opportunities in new sectors, thereby helping to create jobs and reduce UnN instead. Mark Scheme L3 Balanced and well -developed answer on whether disruptive change is the most significant cause of UnN in Singapore. Good reference to extract evidence and Singapore’s context 5-6 L2 Balanced but under-developed answer on whether disruptive change is the most significant ca use of UnN in 3-4 [8]

2017 H1 Economics Preliminary Exams – Suggested Answers Anderson Junior College Economics Department Page 3 Singapore. Limited reference to extract evidence and Singapore’s context L1 Brief explanation or one -sided answer on whether disruptive change is the most significant cause of UnN in Singapore.. Many conceptual errors 1-2 E2 Evaluation based on economic analysis 2 E1 Mere statement with no economic analysis 1 (ii) Discuss the view that supply-side policy is the best way for the Singapore government to achieve low unemployment. Perspective 1( SSP is the best way for the Singapore government to achieve low UnN) Skillsfuture/Workfare - Improving the skills of workers - reduce mismatch of skills reduce structural UnN - subsidies for skills upgrading for workers  improves productivity  lowers COP increases SRAS  actual growth  reduce DD-def UnN - Able to produce higher quality products  Increase demand for X  AD increases  actual growth reduce DD-def UnN Perspective 2a (Limitations of SSP) - May run into budget debt  increase in T in the LR  reduce C and I  reduce AD  worsen DD-Def UnN instead - Difficult to change mindset of both companies and workers “shifting mindsets” - No