2022 SH2 H2 Prelim CSQ2 (Suggested answer)

2022 SH2 Prelim CSQ 2 Suggested Answer Outline(a) With reference to Extract 4 and Table 2, explain two reasons why India is against theremoval of import tariffs.[4] Any Two well-explained argument for protectionism(i.e. against the removal of importtariffs) below with clear reference to Extract 4 or Table 2: Protect Domestic Employment● India is against the removal of import tariffs onindustriessuchasthe‘textiles, agricultureanddairysectors’ (Extract 4) asthiswouldresult inincreaseinitsdomesticunemploymentas such sectors employ ‘hundreds of millions of workers’.[1]● With the removal of import tariffs in such sectors, the lowered relative price of tariff-freeimports fromcountriessuchasChinawouldleadtoamorethanproportionateincreaseinquantitydemandedof importsgiventhat suchgoodsarelikelyprice-elasticindemandwiththegreat availabilityof substitutesfromothercountries.Thiswouldthusleadtoanincreasein import expenditure, andceterisparibus, wouldleadtoafall inaggregatedemand(AD),which would lead to a fall in derived demand of labour, causingcyclical unemployment inIndia.[1] Protect Balance of Payment● AsseeninTable2, Indiahasacurrent account deficit upto2019andthusmaybeagainstthe removal of import tariffs to protect against an overall balance of payment deficit.[1]● By reducing import expenditure, it will help India avoid depleting its foreign exchangereserves, thusallowingIndiatobeabletointervenetosell foreigncurrenciestoappreciateits exchange rate when necessaryfor exampletodeal withpossibleconcernsof importedinflation or boost foreign investor’s confidence in India.[1] (b) Using a diagramand Extract 5, explain howtheremoval of import tariffswouldimpactconsumer surplus.[3] ● There will thus be an increase in consumers’ surplus where consumers will benefit from‘cost-savings passed down’ (Extract 5), where the lowered cost of import tariff which isremovedispasseddowntoconsumersintermsof lower pricesof importedendconsumergoods.[1]● With an import tariff, equilibrium price in the economy would be at PT and quantitydemandedwill beat Q3asseeninFigure1.Withtheremoval ofimporttariffs,therewill beanincreaseinquantitydemandedbyconsumersfromQ3toQ4aswell asfall inequilibriumprice fromPT to PW as seen in Figure 1 thus leading to a greater differencebetweentheprice consumers are willing to pay and actually pay.[1]● Thus, there is an increase in consumers’ surplus is seen in Figure 1 fromarea ABPT toACPW . Well-labelled and well-referenced diagram.[1]

Fig. 1: Tariff Diagram (c) With reference to Extract 6:(i) Explain how an increase in foreign direct investment may impact the balance ofpayment in Singapore in the short run and the long run.[3] ● In the short run, an increase in foreign direct investment (FDI) will meanmoredebittransactionsincreasingthelongtermcapital flowsthusworseningthecountry’scapitaland financial account, despite leading to an improvement in the overall balance ofpayment (BOP) position.[1]● IncreasedFDI alsosuggestsrepatriationof profitsbytheFDIfromSingaporebacktothe FDI’s countries of origin in the long run.[1]● The increase in debits would worsen Singapore’s primary income account, thusworsening the current account and thus worsening of Singapore’s BOP in the longrun.[1] (ii) Explainwhyanincreaseinforeigndirectinvestmentmayleadtoanincreaseintherate of unemployment in Singapore. [2] ● FDI inSingaporewill leadtoanincreaseindemandfor highskilledlabourasseeninhow increase in FDI created ‘a diversity of good jobs in research, productdevelopment, manufacturingandcommercial functions’, causingstructural shiftintheeconomy.[1]● LowskilledlabourinSingaporethuslacksthenecessaryskillstobeemployedinsuchjobs and thus the jobs skills mismatch will lead to an increase in structuralunemployment in Singapore.[1] (d) Discuss the relative benefits of diversificationfor aresilient supplychainascomparedto specialisation of exports to an economy engaging in international trade.[8]Introduction● State that the benefits to an economy can beindicatedbytheeconomy’sachievement ofthe macroeconomic goals as well as improvement to the economy’s standard of living(SOL).

● Diversification will help ensure resilience against supply-side shockswhichmayaffect theinternal stability of an economy.● Specialisation may allow countries to benefits from cost advantages from internaleconomies of scale as well as gains from trading according to theory of comparativeadvantage. Body● Benefit to an Economy with Diversification for a resilient supply chain● The COVID-19pandemichasdemonstratedboth‘supplyanddemandshock’ totheglobaleconomy (Extract 6). This has caused disruptions to supply chainsas‘countriesimposedlockdowns and export bans’. For an economy that is reliant on the global economy forimports such as Singapore, this vulnerability will result in compromise to its internal stability.● By ‘diversifying supply sources’ specially for essential items (Extract 6), Singapore as aneconomy is able to ensure that it is able to haveaccesstoimportedinputsfromcheapersources that are less likely to be affected by lockdowns thus managing the priceof suchimported inputs. This will thus help mitigate any significant increase in imported cost ofproduction to the economy.● This helps to keep the economy SRASfromworsening, thushelpingtocurbanypossibleimport price-pushinflationduetopossiblesupplyshocksor exportbanswithdiversificationof supply sources.● This also helps to maintain internal stability in terms of actual economic growth, as firmsreliant onimportedinputswill respondtothelower cost ofproductionbyloweringpricesaswell as increasing production. ● Benefit to an Economy with Specialisation● For an export-reliant economy such as Singapore, there would be greater benefit gainedfrom specialisation to tap on gains from trade according to theory of comparativeadvantage.● GivenSingapore’shigh-skilledlabouraswell aslargeproportionofcapital endowments,itislikely that Singapore has a lower opportunity cost and thus comparative advantage inhigh-tech and capital-intensive industries. Thus as the global economy shifts to provide

greater opportunitiesinthe‘digital economy’ aswell as‘e-commerce’ whichSingaporehasa comparative advantage in, Singapore will be abletogainfromspecialisingaccordingtoher comparative advantage in these high-tech and capital-intensive industries.● By specialising according to comparative advantage, an economy will thus increase itsexports, assuming mutually beneficial terms of trade. Ceteris paribus, the increase in itsexport revenue would thus lead to an improvement in its aggregate demand (AD). TheincreaseinADwouldthusleadtoamorethanproportionateincreaseinnational incomeviathe multiplier process, thus leading to actual economic growth. The increase in deriveddemandfor labour at eachmultiplier stagealsowouldhelplower cyclical unemploymentinthe economy.● Theincreaseinexport revenuewouldalsoleadtoincreaseincredititemsintheeconomy’sbalanceof tradeaccount, thusleadingtoanoverall improvement initsbalanceofpaymentposition. Evaluative Conclusion● Whether or not an economy should diversify for a resilient supply chain or specialisedependsonthenatureoftheeconomy.Foraneconomythatislargelydependentonexportfor growth such as developing economies, then there are higher relative benefits tospecialisation. For an economy that islargelydependent onimportsduetolackof naturalresources, then such economies should focus more on diversifying for a resilient supplychain. Marking Scheme:L24-6marks For an answer that demonstrates knowledge and understanding and hasapplication and analysis: At least GOODbreadththat considers thefollowingeconomic conceptsin explaining multiple and balanced perspectives, viewpoints,relationships and factors. MOST points chosen should be of relevanceandsignificancein answering the question. At least GOOD depthineconomic analysis that reflects thefollowinginMOST explanations.✔ Accurate use of economic concep