TJC QP H1 Prelims08.TJC

TEMASEK JUNIOR COLLEGE PRELIMINARY EXAMINATION 2008 ECONOMICS: 8816/01 PAPER 1 Wednesday 17 September 2008 1400-1700 Hours READ THESE INSTRUCTIONS FIRST Do not turn over until you are told to do so. Write your name and CG number on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten your work for each question in Section A separately. Fasten your work for Section B and the Cover sheet together. For each question, write your answer on t he separate paper provi ded. Hand in your answer to each question separately. The number of marks is given in bracke ts [ ] at the end of each question or part question. This document consists of 7 printed pages. [Turn over

Section A Answer all questions in this section. Question 1 Rice Crisis The soaring price of rice and dwindling stockpiles of Asia's basic food are causing anxiety across the region. Figure 1: Prices of commodities * TJC Preliminary Examination 2008 2 *Urea: Artificial fertilizer Extract 1: Structural factors driving food prices What are the structural factors underlying the surge in food prices, aside from the direct impact of high and rising oil prices? Some economists cite factors such as rapid economic growth, urbanization, neglected agricultural sectors and climate change. The structural explanation for rising prices of cereals is evident in the case of rice – global rice stocks have fallen and are expected to reach 25 year lows at just 70 milli on tons this year, down from 150 million tons in 2000 (USDA 2008). Offsets of course are likely on the supply side but only if relative prices are allowed to provide the correct signals to farmers. Adapted from The Asian Development Outlook 2008 by Asian Development Bank

Extract 2: Globalisation under fire Trying to curb soaring food prices at home, India, China, Egypt, Vietnam and Cambodia have imposed export bans. This will make it tough for poor, rice-importing countries, in Africa as well as Asia, to secure supplies. In India, the government there also, has stepped in to punish hoarders; action has been initiated against supermarkets trying to put restrictions on retail trade so that they can export more at higher prices. The government hopes that its actions will increase local supplies, thereby curbing price rises. Such curbs may be politically expedient, but they are economically self-defeating. They demotivate farmers which disrupt global supply. Globalisation, is once again on trial and this time it appears to be under heavy fire. Adapted from The Navhind Times, 14 th Apr, 2008 Extract 3: Winners and Losers For decades, the fall in commodity prices coupled with tariffs imposed by importing countries has led to widespread poverty and rural-urban labour drift that resulted in the neglect of the farms in primary producing countries. The way to alleviate poverty is through freer trade. Now with the price hike, when importing countries reduce their tariffs on farm produce, their households enjoy lower prices. The World Bank pointed out that with the recent price hike, since net food importers are richer than net food exporters, there is a redistribution of income between countries. Adapted from the World Bank, Development Research Group, Apr 2008 Questions (a) (i) Using figure 1, compare the trend in the price of rice with that of the price of petroleum. [2] (ii) Apart from government policies, account for the changes in the price of rice. [5] (b) With reference to extract 2, discuss how an export ban to curb rising prices could be “economically self-defeating”. [8] (c) Faced with the failure of the trade policies, discuss how the government could introduce other supply-side policies to ease the soaring price of rice. [6] (d) In the light of the data provided, to what extent would freer trade create more winners than losers? [9] [30 marks] TJC Preliminary Examination 2008 3

Question 2 China’s Balance of Payments and Exchange Rate Table 1: China’s Balance of Payments (US$ billions) Item 2001 2002 2003 2004 2005 2006 2007 2008f Current Account 17 35 46 69 161 250 359 378 Goods and Services 28 37 36 49 125 Goods 34 44 45 59 134 Services -6 -7 -9 -10 -9 Income -19 -15 -8 -3 11 Current transfers 8 13 18 23 25 Not Available Capital and Financial Account # 30 40 71 138 46 -3 100 80 Capital Account 0* 0 * 0 * 0 * 4 Financial Account 35 32 53 111 59 Not Available Direct Investment 37 47 47 53 68 60 75 60 Portfolio Investment -19 -11 12 20 -5 Other Investment 17 -4 -6 38 -4 Net Errors and Omissions -5 8 18 27 -17 Not Available Foreign Exchange Reserves 210 285 402 609 816 1063 1522 1980 f forecast Source: www.worldbank.org/china Quarterly Update, February 2008 # including errors & omissions and safe.gov.cn Balance of Payments, 2001-2005 * small amounts of net capital outflows Figure 2: Exchange Rate Index of the Yuan Source: The Economist, Lost in Translation, 17 May 2007 TJC Preliminary Examination 2008 4

Extract 4: WTO Accession - Good for China China was eager to join the WTO on the basis that membership of a large, multilateral organisation would enhance its ability to compete with other big countries. Late 2001, 15 years after its first application, China finally joined the World Trade Organisation (WTO). Many developing neighbours felt more than a twinge of discomfort. With China already an export juggernaut, they feared that the dismantling of tariff and other barriers that went with WTO membership would make the country irresistible to manufacturers, diverting foreign direct investment that might otherwise have gone to them. Certainly, foreign investment in China has increased, as have China's already heady exports, which since 2003 have been growing at their fastest pace since the early 1990s. In 2004 China overtook Japan to become the world's third- largest exporter, behind America and Germany. In China, according to a paper last year by the Centre d'Etudes Prospectives et d'Informations Internationales (CEPII) in Paris, the processing and assembly of imported parts and components now accounts for more than half of all exports. William Fung, managing director of Li & Fung, a Hong Kong company that leads the field in finding suppliers and managing supply chains for Western retailers and brands, uses a talking toy as an example: the plush fabric was made in Korea and the voice chip in Taiwan, and the final assembly was done in Shanghai. China's export model, then, still consists in big measure of renting out cheap labour and land to foreigners. A number of high-tech firms, particularly Japanese ones, are wary of putting their research centres in China, fearing that their best design work will get pirated. Last year America's Intel greatly expanded its research facilities in Malaysia that design microprocessors, motherboards and chipsets, instead of relocating it to China. Yet the model may already be changing. Home-grown exporters, especially privately owned ones, are honing their skills in China's cut-throat markets. Huawei, a telecoms company, already s