ACJC H2 ECONS P1 Case Study Q2 Answers

H2 Case Study Question 2 Answers (a) (i) Compare the trade balance between South Africa and United States from 2013 to 2017. [2]  Skills: For the command word “Compare”, should identify either  1 similarity and difference OR  2 differences Difference 1: South Africa’s trade balance had improved while United States’ trade balance had worsened from 2013 to 2017. Difference 2: South Africa’s trade balance has improved from a deficit to a surplus trade balance while United States’ trade balance was consistently in deficit throughout the years. 1 mark for each difference explained correctly (ii) Account for the change in the trade balance of United States observed in a(i). [2]  Skills:  Identify a reason from the extracts that accounts for the worsening of trade balance  Explain how this reason leads to either fall in X or increase in M Trade balance refers to the difference between export revenue and import expenditure. US’s trade balance has consistently been in a deficit and worsened over the years. Possible reason 1: Extract 5 mentions that China was accused of unfair trade practices, implying that they were possibly selling their exports at an unfairly low price. This could have been the reason for the United States importing more goods and services from China. Assuming export revenue of United States remain the same, this would cause the trade balance to worsen. OR Possible reason 2: Extract 5 mentions that the United States had structural issues in their economy, possibly causing its exports to be less competitive than before. Assuming that their demand for exports are price elastic, quantity demanded for their exports would have fallen more than proportionately when there is an increase in price of exports, leading to a fall in export revenue. Assuming that import expenditure remains the same, this would cause the trade balance to worsen. 1 mark for identifying one reason 1 mark for explaining how the reason leads to a worsening of the trade balance in the US

(b) Using an aggregate demand and aggregate supply diagram, explain how trade wars among United States and China might affect domestic prices levels in Africa. [5] Skills:  Explain how US tariffs on China would affect China’s economy  Explain how falling national income in China would cause demand for Africa’s resources to fall  Explain how fall in AD in African economics lead to decrease in domestic price level  Illustrate leftward shift of AD curve with subsequent effect on GPL Trade wars among United States and China refer to increased protectionist measures against each other’s imports. Evidence from Extract 5 show that there were 25% tariffs imposed by the US on steel imports from China. Such tariffs would cause prices of China’s steel exports to be artificially higher, leading to a fall in export revenue (X) in China. As X is a component of AD, China’s AD would decrease. This causes China’s national income to fall and a fall in production of goods and services. According to Extract 5, China is a major importer of Africa’s resources and commodities for its own industries. As China’s production of goods and services has fallen, they would demand fewer resources from Africa causing Africa to experience falling export revenue. This would cause a leftward shift of Africa’s AD curve from AD0 to AD1, causing domestic price levels in African economies to fall. 2 marks to explain effect of trade wars on China’s national income 2 marks to explain subsequent effect on Africa’s domestic price levels 1 mark for correct diagram on Africa’s domestic price levels (c) Explain why the Nigerian government might consider it a rational decision to delay its participation in the African Continental Free Trade Area. [3] Skills:  Explain the benefits of participating in the AfCTA  Explain the costs of participating in the AfCTA  Explain how decision was rational by weighing costs and benefits The benefit of Nigeria participating in the African Continental Free Trade Area is an increased access to markets and a reduction of transaction costs in trade (Extract 6). This could benefit Nigeria’s economy if export revenues increase, leading to positive macroeconomic outcomes. However, opening the economy to free trade would also leave Nigeria’s firms to be susceptible to an increase in competition, causing many of its uncompetitive firms to shut-down, worsening its economic situation. From the Nigerian government’s perspective, the economy might not have been ready to manage the increased competition and able to capitalize on the benefits. For example, table 1 suggests a worsening trade balance while in table 2, growth

has also fallen from 2013 to 2017. Therefore, it was a rational decision to delay its participation in the agreement as costs of participation was likely to outweigh the benefits. 1 mark for explaining the benefit of participation 1 mark for explaining the costs of participation 1 mark for explaining Nigeria government’s rational decision (d) Assess whether giving priority to private sector investments over public investments is a more appropriate approach in driving higher economic growth. [8] Approach to question: i. Unpack private sector investments and public investments ii. Explain how private sector invest ments drive higher economic growth iii. Explain the challenges of privat e sector investments driving higher economic growth iv. Explain how public investment s drive higher economic growth v. Synthesize with economic criteria whether private sector investments is more appropriate than public investments Angles for evaluation: i. Judgement of the extent of priority given to private sector investments in developed vs developing countries ii. Discussion of conditions needed for private sector investments to drive higher economic growth (e.g. nature of industries) * examples of evaluative comments in the suggested answers are highlighted Introduction: Private sector investments refer to investments made by profit driven private companies which are not controlled by the government. Public investments refer to government spending on goods and services, usually on large scale infrastructure or services like healthcare and education. Both contribute to economic growth through investments (I) and government expenditure (G) respectively. Whether more priority should be given to private sector investments over public investments to increase economic growth depend on the types of industries invested in and the current state of the economy. Thesis: Private sector investments can drive higher economic growth as it boosts competitiveness. As private firms are profit maximisers, encouraging private sector investments would encourage competition between firms. With increased competition, firms are incentivized to innovate and find more productive methods to become more cost efficient and increase the quality of their products. Moreover, Extract 8 mentions that global companies br ing along their technical and management techniques and upgrade the skills of local workers they employ. This transference of skills increase the quality of resources. With an increase in productivity and a fall in cost of production in the economy, the SRAS and LRAS will increase. In addition, increased competitiveness could lead to increase export revenue as the country's goods and services become more attractive. This leads to an increase in AD. Both effects drive higher actual and potential growth.

Counter-argument: Private sector investments may only concentrate in certain sectors benefiting a small part of the economy. While increase private sector investm ents improve productivity and create