2022 JC2 H2 Prelim CSQ2 (Suggested Answers)

Question 2: Benefits and Challenges of Globalisation Extract 6: How Brexit impacts globalisation KeybeliefsofglobalisationliketradeandimmigrationwereamongthefactorsthatpushedtheUKtowards“Brexit”[atermusedtodescribeUK’s decisiontoexittheEuropeanUnion(EU)],leadingmanyexpertstowonderwhetherglobalisationisstillwelcomeintoday’s world.UK’svotetoleavetheEUin2016wasaclearreminderthattheUKpublicwasn’thappywiththesepolicies, which experts said showed dissatisfaction with globalisation. TheEU,whichcomprises27EuropeancountriesincludingtheUK,allowsfreetradeandfreemovementofpeopleamongstitsmembercountries.ExpertswarnedthatBrexitcoulddisrupttrade links with the EU and jeopardize jobs in the UK. Source: https://www.cnbc.com, 28 Jun 2016 Figure 1: Euro/ Pound exchange rate 2016- 2021 Source: Bloomberg Table 2: UK’s annual inflation rateYear Annual inflationrate (%)2016 0.72017 2.72018 2.52019 1.8

Source: https://www.ons.gov.uk Extract 7: Damage of Brexit on UK Theeconomyhasslowed,andmanybusinesseshavemovedtheirheadquarterstotheEU.Businessinvestmentdiminishedby 11% between2016and2019. Someinternationalbusinesseshavemovedout of UK.Brexit'sbiggestdisadvantageis its damageto theUK's economicgrowth. Mostof thishasbeendueto theuncertaintysurroundingthefinaloutcome.UncertaintyoverBrexitslowedtheUK’s growthfrom2.4%in 2015to 1.6%in2019. TheUKgovernmentestimatedthatBrexitwouldlowertheUK’sgrowthbyupto6.7%over15 years. TheBritishpound[UK’s currency]fellimmediatelyaftertheBrexitvote.Thathelpsexportsbutincreases the prices of imports. It has not regained its pre-Brexit high. Source: The Balance, 24 Jan 2022 Extract 8: UK productivity, competitiveness and standard of living ThepublicdebateoverBrexithadnotbeenbasedonafactualunderstandingofthestateoftheUKeconomy. TheproblemsfacingtheUKwerenotcausedbytheEUbutliesathome.Hence,leavingtheEUwillnoteliminatetheseproblems.Therealissueis a patternofpersistentweaknessesin UKcompetitiveness,anditsconsequencesforcitizens.ThelackofeffectiveactiononupgradingUKcompetitivenesshasbeenafundamentalfailureoftheUKgovernment.Brexitcouldtriggerlongover-dueactionbytheUKgovernmenttoboostproductivitytoenhancecompetitiveness.ThisratherthanawaveofnewtradeagreementsoutsideoftheEUshouldbewhat UK should focus on. UKprosperityhasbeenlagging.GDPpercapitaremainswellbelowotherWesternEuropeancountriesinlevelandgrowth.Wagegainshavestagnated,andtheUK’sstandardoflivinghascontinuedto lagpeers.Prosperityhasbeenuneven.Sincethe1990stheUKregisteredthegreatest income inequality of any European OECD country. Changesin prosperityoverthelongtermdependonproductivity. Productivityis thecentralmeasureof competitivenessanda keydriverof a nation’s standardof living.TheUK’sweaknessesin productivityis the root causeof the nation’s disappointingeconomicperformance. UK productivity is lower than other peer countries in OECD. The UK is underperformingbecauseof weaknessesin competitivenessfundamentals.Infrastructurequalityis weakandinsufficientto supportfurthergrowth.Therearemajorskillshortages,especiallyin so-called‘middleskills’.UKspendingon innovationlagsleadingEuropeanandglobalpeers.Companiescompetemostlyonpriceandcost,ratherthanon

advancedinnovation-basedstrategies.AnditistheperformanceofexportersoutsideofLondonthat drags down the country’s overall productivity record. Source: https://www.hbs.edu, September 2018 Extract 9: Impact of globalisation Globalisationhaslongbeena keydriverof economicgrowthformanycountries.It allowscountriestoproduceandconsumeatmoreoptimallevelsthroughincreasedspecializationandgreatercompetition.Producerscanenjoyeconomiesof scaleandreducecoststhroughtheenlargementofmarkets.Consumersbenefitfromlowerprices,andaccesstoawidervarietyofgoodsandservices.Internationaltradealsohelpstofosterhealthycompetition,thusspurringtechnological progress and productivity growth. Smalleconomiesmustcontinuetoembraceglobalisationastheydependonglobalmarkets,freetradeandfreecapitalflowsto sustaintheirlivelihood.A willingnessto adoptnewtechnologies is key to helping these economies capture opportunities. Onthewhole,however, countries’experiencewithglobalisationhavebeenmixed,withthegainsandlossesbeingunevenlyspreadoutat theinternationalandnationallevels.Withrespecttothegainsfrominternationaltrade,thesehaveaccruedmainlytoregionswithahighconcentrationof export-orientedindustrieswhilethewagegapbetweenskilledandunskilledworkershaswidenedwithglobalisationandtheintroductionofnewtechnologies,resultinginrising inequality. Inrecentyears,concernsaboutthenegativesideeffectsofglobalisationledtoashifttowardstrade protectionism as anti-globalisation sentiments rises in more countries. Source: BIS Papers chapters in Bank for International Settlements (ed.), 2018 Extract 10: Coronavirus pandemic will cause a ‘much bigger wave’ of protectionism Governmentsaroundtheworldwillturnincreasinglyprotectionistas theytry to limittheeconomic damage from the coronavirus pandemic, a trade expert said. “Astheeconomicdistressincreases,theresponsebymanygovernmentswillbeto assistfavoredindustries,favoredsectorsor sectorswherethey’reparticularlyconcernedaboutcatastrophe,especiallyinjobs.Andtheywillrespond,mostlikely, bypursuingprotectionism,”she explained. “Butforeachindividualcountry, that’sthesolutionthatmakessense—sorestricttrade,focusdomestically, keepyourownpeopleasemployedasyoucanandthendon’tworryaboutanyoneelse,” she added. “But, of course, the net result is everyone else is worse off.”

Source: https://www.cnbc.com, 9 Apr 2020

Questions (a) (i) WithreferencetoTable2,statewhathappenedtothegeneralpricelevelof the UK from 2016 to 2019. [1] (ii) Withtheuseofa diagram,explainhowthechangeinexchangerateoftheBritishpoundobservedinFigure1canleadtothechangeingeneralprice level stated above. [5] (b) ExplainhowtheUK’scurrentaccountofthebalanceofpaymentsislikelytobeaffectedinthelongrunbyinternationalbusinessesmovingoutofthe UK. [2] (c) Explain how “uncertainty over Brexit slowed the UK’sgrowth”. [4] (d) Discusswhetherthegovernmentshouldboostproductivityratherthansign new trade agreements to improve the UK’s standard of living. [8] (e) Usingeconomicanalysisandtheevidenceprovided,discusswhethercountriesshouldcontinueto embraceglobalisationor pursuetradeprotectionism. [10] [Total: 30]

Suggested Mark Scheme (a) (i) WithreferencetoTable2,statewhathappenedtothegeneralpricelevelof the UK from 2016 to 2019. [1] It has increased. (ii) Withtheuseofadiagram,explainhowthechangeinexchangerateoftheBritishpoundobservedin Figure1 canleadto thechangeingeneral price level stated above. [5] Generally, depreciationincrease in general pricelevel (1 mark) Depreciationpriceofimportsincreases,includingimportsofrawmaterialsandintermediategoodsforproductionofgoodsandservicesriseinfirms’costofproductionfallinfirms’profitabilityfirmscutdownproductionfallin SRAS upwardshiftof theSRAScurveriseinGPLimportedinflation OR Depreciation fallin priceof exportsin termsof foreigncurrencyandincreaseinpriceofimportsintermsofdomesticcurrencyimprovementinUK’s BOTif theMarshall-Lernercondition(PEDx+ PEDm> 1) holdsincrease(X-M) increaseAD rightwardshiftof the AD alongtheupward-slopingorverticalportionofAD(assumingtheeconomyisoperatingnear or at full employment)increase in GPLdemand-pull inflation Explanation of imported inflation or demand-pull inflation (3 mark)Diagram (1 mark) (b) ExplainhowtheUK’s currentaccountofthebalanceofpaymentsislikelytobeaffectedinthelongrunbyinternationalbusinessesmovingout of the UK. [2] Fallin investmentsfromoverseas lessprofitsrepatriatedoverseasbyforeignfirms improvementin incomebalance improvementin currentaccount balance, c.p. (c) Explain how “uncertainty over Brexit slowed the UK’sgrowth”. [4]Uncertainty difficultyforfirmsto predictprofitabilityof futureinvestmentprojectsslowdownthepaceofI slowerincreaseinADslowerriseinRNYslower actual growthSlowerincreasein I slowerincreasein productivecapacity slowerincreaseinLRASslowerincreaseinthefullemploymentlevelofRNYslower potential growthoverall rate of increase in RNY Is lower

OR Unce