PJC H2 ECONS P1 Q2 Suggested Ans

1 Question 2: The impact of trade and automation on jobs (a) (i) State the relationship between manufacturing employment (as a % of total employment) and imports from China (as a % of GDP). [1] Suggested answer: There is an inverse relationship between manufacturing employment (as a % of total employment) and imports from China (as a % of GDP). (ii) Explain how changes in imports from China have contributed to the change in manufacturing employment. [3] Suggested answer: As China has an abundance of low cost labour, it has a comparative advantage (1) in the production of low cost, labour intensive consumption goods and this has resulted in the replacement of US domestic production of these goods with imported goods from China. This has caused a fall in the manufacturing employment in the US as imports from China increases. (2) (As show in Figure 1) (b) Compare the change in China’s current balance between 2010 and 2015 with that of the US over the same period. [2] Suggested answer: From 2010 to 2015, 1) Between 2010 to 2015, China Current accounts were always in surplus whereas US Current accounts were always in deficit. (1) 2) China Current accounts surplus has increased while US Current accounts deficit was relatively constant / has increased slightly. (1) (c) Explain whether an increase in trade between China and the US would result in higher standard of living in the US. [6] Suggested answer: With an increase in trade between China and USA there would be an increase in imports and exports between the two countries. US firms are able to enlarge its global market and increase its total revenue and hence profits by exporting to China. With an increase exports, there would be an increase in AD and via the multiplier effect, there would be a larger increase in real output and hence real national income (NY). With an increase in real NY, there would be an increase in income per capita (assuming that the rate of population increase in USA is slower than the rate of increase in real NY) and an increase in purchasing power and hence an increase in SOL. And with an increase in export and real output, there would be an increase in demand for labour. This would result in an increase in the wage rate for labour. Income of workers would increase and hence purchasing power increase and hence increasing the SOL of US workers. An increase in trade would also imply increase competition and hence increased variety of goods and services at lower prices available for consumer s. This would increase consumer surplus and hence consumer welfare and an increase in SOL for USA. However, on the other hand, with increased trade and increased competition, firms which are not competitive may be driven out of the market. As shown in Figure 3, the US is facing a trade deficit with China which imply that the US is importing more fr om China than its exports to China. This may imply that the US does not have a comparative advantage in the production of certain goods and services, such as labour intensive goods. It may result in the fall in demand for the US goods and a fall in

2 demand for labour the US. This may worsen the SOL in the US. And if these lower skilled workers are unable to find jobs in other sectors of the economy due to a lack of the necessary skills, it may result in income inequality among the workers who possess the necessary skills and those who do not. In conclusion, whether an increase in trade between China and USA would result in higher SOL in the USA would depend on how it could contribute to the economic growth of USA and its possible impact on employment opportunities for consumers in the USA. (d) Assess the extent to which automation is the main cause of unemployment in an economy. [8] Suggested answer: Automation is the main cause of unemployment in the economy. Automation of industries has resulted in the replacement of human labour with machinery and robots. This has not only resulted in the retrenchment of the excess workers, it has also resulted in a decrease in demand for labour. Hence, causing unem ployment to increase. This is shown in Figure 2 where there was an increase in output but there is a fall in employment in the US manufacturing sector. Furthermore, automation results in structural unemployment. Due to the adoption of new technology, high-skill workers are highly dem anded. Those who have been made redundant do not have the skills and knowledge that match the requirem ents of jobs available. Hence, they become structurally unemployment. But automation can also help to boost employment. With automation, for example, has enabled US firms to be more productive and has increased industrial output. With the increase in productivity, it would result in an increase in real GDP and national income and hence purchasing power. This would result in an increase in consumption and an increase in demand for goods and services and more goods and services would need to be produced. This would result in an increase in investment and the demand for labour, especially in the services sector to service the increase demand for goods and services. In addition, with automation, there would be an increase in demand for higher skilled workers to enable the automation and to service and maintain the machinery. Hence, automation may result in the redundancy of the lower skilled workers but it would also create employment opportunities for t he higher skilled workers. This would result in an increase in the type of unemployment, that is, st ructural unemployment rather than an overall increase in unemployment rate. On the other hand, automation has been seen as a solution to countries such as Japan and Singapore to resolving the problem of an aging population and a shrinking workforce and its dependence on foreign labour and at the same time as a means to increase its productivity and the competitiveness of its economy. In conclusion, the extent to which automation is the main cause of unemployment would depend on the nature / condition of the economy. To some countries where the majority of workers are employed in the manufacturing sectors, automati on would have a larger impact on unemployment. To other countries such as Japan and Singapore which are facing a shortage of labour, automation is seen as a means to increase productivity and hence competitiveness. (Evaluation) Also, it should be noted that although automation may reduce certain jobs in the manufacturing sector, it may also increase job opportunities as the need for skilled workers increases. (Evaluation) (e) Discuss the most appropriate policies that the US and Singapore should adopt to tackle unemployment. [10]

3 Suggested answer: US faces problem of unemployment due to the opening up of its economy to international trade as well as automation. Inflows of cheap imports into the US market and automation have both resulted in loss of jobs in the US manufacturing sector and structural unemployment. Similarly for Singapore, the rise in automation can lead to job loss in the manufacturing sector and structural unemployment. As such, the governments needs to identify the appropriate policies to deal with the root cause of unemployment. These can be demand side and supply side policies to create new jobs and increase the demand for labour and to upgrade the skills of workers to meet the needs of the automate