PJC_H2_ECONS_P1_Q2

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 1 PJC 2017 H2 Prelim Exam Paper 1 Question 2: Economic Performance, Prospects and Lessons (a) Compare China’s GDP growth between 2010 and 2015 with that of India over the same period. [2] Suggested answer: Both experience positive GDP growth between 2010 an d 2015. While China GDP growth fell throughout the whole period, India GDP growth fell till 2012 and rises thereafter. (b) Extract 5 suggests an increase in China investment overseas. (i) Explain one reason why Chinese firms are buying competitor firms overseas. [2] Suggested answer: (Candidates need to focus only on one advantage – revenue advantage or cost advantage) When two companies come together by acquisition, th e joint company benefits in terms of cost efficiency. An acquisition is able to create econom ies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increas es, there are strong chances that the cost of production per unit of output gets reduced. This benefits the firms in terms of profits gain. Or By buying a competitor firm overseas, the joint com pany enjoys tremendous amount of revenue advantages due to their large size and market share . A large firm has the resources to engage in non-price competition such as advertisement of thei r products to make their goods more cross- price inelastic relative to their rivals. Hence, th ey are better able to withstand the competition fro m the rivals. They could even possibly set a higher p rice for their products without losing many of their customers given an inelastic demand, leading to rising TR. (ii) Comment on the likely effects of this on China ’s balance of payments. [4] Suggested answer: An increase in China investment overseas will lead to a deterioration of her capital account in the short run as this is recorded as a debit entry in t he long term capital account. Ceteris paribus, her BOP will deteriorate. However, in the long run her balance of payment may improve as investment overseas reap returns in the form of investment inc ome such as profits and dividends. These are remitted back to China and are recorded as credit e ntry in China’s Current account in her Balance of Payment. (c) Explain the trade-off between inflation and growth in view of the action taken by the Indian government to deal with the weakening of the Indian Rupee. [4] Suggested answer: To deal with the weakening of the Indian Rupee, the Indian government need to increase interest rate to increase net capital inflow. A strong rupee will result in a fall in price of imports and help s to mitigate the effect of imported inflation which India is susceptible to as her growth is driven main by her reliance on imports of cheap oil. However, an i ncrease in interest rate