HCI_H2 Econ Prelims P1

HWA CHONG INSTITUTION Preliminary Examinations 2008 General Certificate of Education Advanced Level Higher 2 ECONOMICS 9732/01 PAPER 1 Case Study 8 September 2008 2 hour 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name and CT 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. Answer question 2 on a fresh sheet of paper. At the end of the test, submit your answers to question 1 and question 2 separately. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists 7 printed pages. HWA CHONG INSTITUTION [Turn over ©HCI Prelims 2008 9732/01/N/08

©HCI Prelims 2008 9732/01/N/08 2 Answer All questions. Question 1 Globalisation and Inflation Extract 1 Globalisation and Inflation The entry of China, India and Eastern Europe into the global market economy effectively doubled the economy’s labour supply driving down the wages of unskilled labour. The result of this progressive integration of more countries into the international trading system - production of goods and services that is intensive in the use of unskilled labour and labour-intensive elements within production cycles have shif ted to these emerging economies. This has increased the scope for businesses in the industrialised world to organise production in the most cost-efficient manner possible. However, the rapid Asian growth has also been a major driver of the tripling of oil prices since 2004, as well as pushing up the prices of non-oil commodities substantially. Countries importing these commodities have therefore suffered an increase in the price of these imports. Globalisation has changed the inflationary process. Increased competition from these labour- abundant economies, freer movement of labour and increased trade and specialisation associated with globalisation reduces the response of inflation to the domestic output gap 1, and at the same time potentially more sensitive to the balance between world demand and supply. Variations in aggregate demand become less effective as a means of controlling inflation. The integration of China and the other emerging economies represents both an opportunity and a challenge for the industrialised economies. It is an opportunity because it allows a more efficient international division of labour and has the potential to raise living standards in both East and West. And it is a challenge because the global relocation of activities pote