SRJC H1 ECONS

1 © SRJC 8819/01/JC2PreliminaryExam/2016 [Turn over ECONOMICS 8819/01 Higher 1 PAPER 1 14 September 2016 3 hours Additional Materials: Answer Paper SERANGOON JUNIOR COLLEGE JC2 Preliminary Examination READ THESE INSTRUCTIONS FIRST Write your name and civics group 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. Sections A Answer all questions. Section B Answer one question. Start your answers to each case study question and essay question on a new sheet of writing paper. Fasten your answers to all three questions separately. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 8 printed pages.

2 © SRJC 8819/01/JC2PreliminaryExam/2016 Section A Answer all questions in this section. Question 1 Oil Prices Lower Amid Global Uncertainty Figure 1: Crude Oil vs Food Price Indices Source: http://materials-risk.com/crude-returns-how-low-oil-prices-have-broken-the-relationship- to-food-prices/, accessed August 2016 Figure 2: Unsettled outlook of economies Source: The Economist, 25 October 2014

3 © SRJC 8819/01/JC2PreliminaryExam/2016 [Turn over Extract 1: What’s driving the plunge in oil prices? The Organisation of Petroleum Exporting Countries (OPEC) at its latest meeting in Vienna in December decided to keep oil production at its current levels despite the recent drop in oil prices. The result is there is now n o supply discipline at a time when global demand, particularly from China, appears to be dropping. Although all producers would benefit from a higher price, no one will unilaterally cut output to make it happen. Saudi Arabia is no longer prepared to act as a lone swing producer, reasoning that it will just lose market share if it does so. Much of the growth in supply has come from the U.S., where high prices made producing oil and gas using hydraulic fracturing profitable. Between 2009 and 2014, global crude oil supply increased by almost 5 million barrels per day, of which 3.3 million barrels came from the U.S., according to the Energy Information Administration. It looks like U.S. shale production will finally ease in 2016, though perhaps not until the second half of the year, but that prospect is more than offset by the possibility of Iran returning to the market next year. On top of that, the United Nations Climate Change C onference in Paris seemed to suggest that world leaders were more committed than before to switch their economies away from oil and other fossil fuels. Source: Adapted from various sources Extract 2: Corporate winners and losers amid the oil price crash The latest collapse in oil is having an enormous impact. Even though the price has rebounded in 2016, it is still about 60 per cent down since mid-2014. Conventional wisdom says cheap fuel is good news for airlines, makers of oil -guzzling cars, and other companies able to produce cheaper goods for shoppers with wallets fattened by lower pump prices. Conversely, a low price is supposed to be bad news for power generators using renewable energy and electric carmakers. Sales of fuel-hungry sport utility vehicles have jumped, but government incentives have to some degree protected the much smaller electric car industry. Monthly sales of electric cars and other vehicles in the US have fallen since the oil price started to decline in mid-2014, but they have risen in Europe, according to figures from Jato Dynamics, an automotive research firm. Airline executives finally have a smile on their faces. After seeing fuel become their single biggest cost in the era of high oil prices, carriers are now celebrating the plunge. But while airlines are natural winners, how quickly they can reap the full benefits from cheap oil has varied significantly across the industry. This largely comes down to an airline’s hedging contracts. Fuel typically accounted for about one-third of carriers’ operating costs before the oil crash. Thus many airlines opt to reduce their exposure to volatile and potentially rising fuel costs by turning to hedging which allows them to lock in a guaranteed amount of fuel for future consumption at a fixed price. Source: Financial Times, 13 April 2016

4 © SRJC 8819/01/JC2PreliminaryExam/2016 Extract 3: Who are the winners and losers? China should gain from falling prices. However, lower oil prices won't fully offset the far wider effects of a slowing economy. In Japan, lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe's growth strategy to combat deflation. India’s analysts say falling oil prices will ease its budget and current account deficit. At the same time, the cost of India's fuel subsidies could fall by $2.5bn this year - but only if oil prices stay low. The halving of global oil prices since mid-2014 has allowed the Indian government to raise diesel and petrol fuel taxes and cut diesel prices by 25-30 per cent - a windfall gain for households as well as businesses, and dampening inflationary pressures in the economy. With oil at $115 a barrel, Saudi Arabia earns $360 billion in net exports a year; at $85, $270 billion. Its budget has almost certainly gone into the red. Prince Alwaleed bin Talal, an influential businessman, called lower prices a “catastrophe” and expressed astonishment that the government was not trying to push them back up. But Saudi Arabia’s long-term interest may in fact be served by a period of cheaper oil. It can afford one, unlike most other exporters. Though public spending has risen in recent years, its foreign reserves have risen more. Net foreign assets were 2.8 trillion riyals ($737 billion) in August—over three years’ current spending. Source: BBC News, 19 January 2015 Questions (a) (i) Using Figure 1, describe the trend of oil prices from 2005 to 2016. [2] (ii) Using relevant case material, account for the trend in oil prices from 2014 onwards. [4] (b) Explain the relationship between oil prices and food prices as seen in Figure 1. [3] (c) Account for the value of price elasticity of supply for oil. [2] (d) Using Extract 3, explain the likely effects of the ‘growth in supply’ (Extract 1) on producers’ revenue in the markets for oil and one other related product. [6] (e) In the light of E xtract 1, explain why ‘world leaders are more committed to switch their economies away from oil’ to achieve efficiency in resource allocation. [5] (f) How far do you agree that the oil price slump will bring about more benefits than costs to an economy? [8] [Total: 30]

5 © SRJC 8819/01/JC2PreliminaryExam/2016 [Turn over Question 2 The Global Economy Pre and Post Crisis: Heading for another recession? Figure 3: Labour and unemployment statistics Source: The Economist, 2 May 2015 Extract 4: The economics of low wages In most places, the recession that followed the 2009 financial crisis had dire effects on wages. In America, workers have been demonstrating for h