2013 SRJC H2 Econs P1

© SRJC 9732/01/JC 2 Prelim Exam H2 Econs/2013/Suggested Answer Outline ECONOMICS 9732/01 Higher 2 Paper 1 Case Study Questions 2013 2 hours 15 minutes Additional Materials: Writing paper SERANGOON JUNIOR COLLEGE JC 2 Preliminary Examination READ THESE INSTRUCTIONS FIRST Write down 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. Answer all questions. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.

© SRJC 9732/01/JC 2 Prelim Exam/2013 2 Answer all questions. Question 1 Globalisation and inequity Extract 1: Car industry running harder Battered by the European sovereign debt crisis and recession in countries from Italy to Britain, car sales within the EU are on track fo r a fifth consecutive year of decline. The car industry was also affected by the rising cost of several important inputs such as steel and metals that have further narrowed the profit margins on car production. Excess capacity problems are rampant in Europe. According to AlixPartners, a business consulting firm, about 30 of the 98 assembly pl ants in Europe are operating below 70 per cent of capacity. Excess capacities force manufacturers to engage in price-cutting to protect their market shares, resulting in a vicious circle leading to even lower profits. The worst affected markets were France, Spain and Italy where almost 85% of the cars sold are small- and medium-sized cars which already have lower (profit) margins. The risk of excess capacity, and thus of fierce pr ice competition, is emerging at a time when carmakers are having to invest heavily in new technology. Fortunately they still have plenty of scope to cut costs by standardising both their “platforms” -- the underpinnings onto which the rest of the car is assembled -- and other components under the bonnet that drivers do not see. One reason why Volkswagen has done so well in recent years is that it has taken such standardisation further than most. This has allowed it to offer a broader range of vehicles across its many brands. AlixPartners predicts that most of the growth in car sales in the coming years will come from such “megaplatforms”, each of which will underpin more than one million cars of all sorts every year. Flexible production lines will be able to tu rn out cars to fit every niche in the market, enabling makers to offer buyers “mass customisation” of vehicles. Cars are becoming more like smartphones: expensive to develop and market, and with some pricey parts, but cheap to assemble in their millions, with endless variations. Source: The Economist, 13 April 2013 Extract 2: A new era accelerating toward 2020 A recalibration of the automotive industry value chain is in motion. The marked decline in car sales led to excess capacity in plants around the world and reduced profitability, triggering reduced capacity, resourcing to stronger suppliers, a rash of bankruptcies, and in some cases, the need for government bailouts. Of course, the crisis will not last forever and short-term sales projections foresee over 70 million units sold worldwide by 2015. While opin ions differ about the timing of the turnaround, there is no doubt that the structure of the aut omotive industry will be deeply transformed. For example, most cars manufactu red in 2007 had their primary development in Asia and Europe and this trend is expected to continue into 2015. The move to lower cost regions will be driven partly by lower labour cost in emerging markets. The new pockets of low cost areas within the region will become hubs for car equipment manufacturers at the expense of higher cost exporters such as Spain and Germany, the US and Canada. Source: www.deloitte.com, 4 August 2009

© SRJC 9732/01/JC 2 Prelim Exam H2 Econs/2013/Suggested Answer Outline 3 Extract 3: Mind the gap The problem of a widening income gap is one that many other countries, including America, Britain, Canada, China, India, have to cont end with. And it may be that such a split is inevitable in a globalised world. The experience of rising inequality in these countries over the last two or three decades suggests that it is dr iven by forces that are at least partly global in nature – namely globalisation and technological change. Global competition both depresses wages at the bottom and boosts wages at the top. At the low end, salaries of unskilled workers would be kept low because of competition from cheaper alternatives in places like China and India. Me anwhile, at the higher end, workers being deployed to oversee foreign operations will naturally attract higher pay and perks like expatriate allowances. An example of this sort of competition can also be seen in the United States, where a lot of lower-end jobs have been outsourced to cheaper nations. Many economists now worry that widening income disparities may have damaging side- effects. In theory, inequality has an ambig uous relationship with prosperity. It can boost growth, because richer folk save and invest more and because people work harder in response to incentives. But big income gaps can also be inefficient, because they can bar talented poor people from access to education or feed resentment that result in growth- destroying policies. Income inequality in Singapore has risen significa ntly in the last decade. After accounting for government benefits and taxes, its Gini coefficient rose from 0.430 in 2000 to 0.452 in 2010. The Gini coefficient measures the income dist ribution across a country and is often used as a gauge of the income gap. The Singapore government has responded to concerns over the widening income gap. It promised more social spending while hiking taxes on luxury cars and investment properties. And in the past few years, it has curbed the inflow of foreign labour, cajoled companies to invest in enhancing productivity, and expanded its skills training programme to "upgrade" workers. It is also redistributing signific antly straight from government coffers to low-income and older workers' pay cheques, through schemes such as the Workfare Income Supplement, the Special Employment Credit and the Wage Credit. "The Government deserves a lot of credit for really pushing the restructuring this time. There is a lot of resources being put in here," says Institute of Policy Studies research fellow Tan Meng Wah. But economists and experts point to blind spots, and say it remains to be seen if the government's new zeal can keep up with inequality's own momentum. Adapted The Straits Times, 8 April 2013

© SRJC 9732/01/JC 2 Prelim Exam/2013 4 Table 1: Changes in wages and salary and value added in the car industry, 2000 – 2007 Wages and Salary (US$) Value added per employee (US$) 2000 2007 2000 2007 France 28 621 55 461 71 918 104 092 UK 39 253 68 947 51 243 147 442 Japan 66 423 60 558 241 975 290 149 Source: http://www.jetro.go.jp, 2012 Table 2: Top 4 Car sales in the UK, June 2012 Car manufacturer % of total sales volume Volkswagen Group 20.0 Ford 12.5 General Motors 11.9 BMW-Mini 11.3 Others 44.3 Source: Automakers & Society of Motor Manufacturers & Traders, 2012 Questions (a) (i) With reference to Table 1, compare the changes in wages and salary and value added per employee in the UK. [2] (ii) To what extent can the information in Table 1 be used to draw conclusions about