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 will increase the cost of borrowing and hence reduce C on big ticket items an d I as at the same expected returns, some investment projects are no longer profitable. A red uction in C and I will reduce AD and hence reduce GPL. But an increase in i/r will at the same time retard growth as a fall in AD will reduce real GDP through the reverse multiplier process. (d) Discuss whether the data provided are sufficient to compare China’s standard of living with [8]

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 2 that of India in 2015. Suggested answer : Define SOL Standard of living of a country refers to the socia l and economic well-being of a country which includes both the material and non-material aspects of life. The material well-being is determined by the quantity and quality of goods and services f or consumption while the non-material well- being is the quality of life and environment which ones lives determined by the intangible factors such amount of leisure and life expectancy. GDP is the purchasing power parity (PPP) value of all final goods and services produced within a country in a given year divided by the population for the same year. The GDP per capita, PPP is higher in China than India. GDP per capita, PPP is a commonly used national income statistic to compare living standards between countries. International comparisons have to be undertaken in a common unit of measurement for example, the US dollar. The market exchange rate, however is not a good indicator of the relative domestic purchasing powers of the two currencies. Thus, the GDP per capita is converted using Purchasing Power Parity (PPP) exchange rate which is the rate of exchange that would allow a given amount of money income country to buy the same amount of gods in another country after exchanging it into the currency of the other country. Thus, since GDP per capita in PPP in China is higher than GDP per capita in PPP, it meant that average citizens in China have more goods and services available for consumption than in India. This indicates a higher level of material standard of living in China. Additionally, a higher level of good and services led to an increase in demand for labour, resulting in an increase in wages. A higher wage means Chinese households was earning higher income and disposable income and they had higher purchasing power to buy more and better quality goods and services compared to India The difference in GDP per capita, PPP could lie in the non- availability of important data in some countries and in the nature and reliability of the data collected. Underground economy such as a cleaner who is paid in cash and does not declaring this earning are not accounted for in the statistical figure but contribute to the income and therefore material SOL of the residents. The size of underground economy differs between China and India. This meant that India could have a higher standard of living than China if there is a large underground economy. Additionally if the higher GDP per capita is due to longer working hours of workers, this meant that the Chinese had less leisure time and rest than India. This could lead to worse health condition and higher stress level. As a result, the Chinese workers could have experienced a fall in a quality of life. Need to know working hours to determine whether the China workers have a lower quality of life than India. Despite the higher GDP per capita, it does not reflect the income distribution in China and India. It is merely an average figure indicating the amount of goods and services available to each citizen in the country.

PIONEER JUNIOR COLLEGE (E CONOMICS DEPARTMENT ) 3 The higher GDP per capita also enables China’s government to earn higher tax revenue and hence able to increase their spending on merit goods such as better healthcare and education services. This is evident from the higher healthcare expenditure per capita (US$) for China than India. This leads to improvement in non-material SOL such as higher life expectancy and literacy rates. Gini coefficient varies from a value of 0 to 1. The larger the Gini coefficient, the less equitable is the income distribution. As seen from the data, the Gini Coefficient for India is lower than the Gini Coefficient in China. China’s higher Gini coefficient indicates that the income distribution in China is more unfair than India. Thus, even though India has a lower GDP per capita, standard of living of the general population could be higher in India. - Human Development Index (HDI) is considered as a composite indicator of SOL, taking into consideration economic, social and demographic aspects. It is a composite index designed by the United Nations comprising three elements: an index for life expectancy, and index