AJC H2 ECON P1 CASESTUDY

READ THESE INSTRUCTIONS FIRST Write your name, PDG and index number 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 question parts. At the end of the examination, fasten your answers to each question separately. Fasten this cover page in front of your answers to Question 1. The number of marks is given in brackets [ ] at the end of each question or part question. Name _________________________( ) PDG ______/10 This document consists of 8 printed pages, including 1 “blank page”. Marks Question 1 / 30 Question 2 / 30 Total Marks / 60 ANDERSON JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATIONS 2011 HIGHER 2 9732/01 ECONOMICS Paper 1 13 September 2011 2 hours 15 minutes Additional Materials: Answer paper [Turn over

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3 Answer all questions. Question 1 A look at Korea and Japan Extract 1: Korea Following the severe contraction in late 2008, Korea has achieved one of the earliest and strongest recoveries in the Organisation for Economic Co-operation and Development (OECD) area, led by exports and its stimulus package. The sustained pick-up in exports, together with a rebound in domestic demand, is projected to help boost output growth to 5 to 6 per cent in 2010. Extract 2: Japan The severe recession triggered by the global crisis has bottomed out, thanks in part to a rebound in exports, although production remains well below capacity. Growth is projected to pick up gradually to around 3 per cent in 2010. Nevertheless, the unemployment rate is likely to stay around 5 per cent through 2010 and deflation will persist, indicating that consumers will be reluctant to spend and business confidence will remain weak. Table 1: Korea’s Macroeconomic Indicators 2006 2007 2008 2009 2010* GDP (US$ billion, PPP) 1191 1287 1344 1375 1459 Real GDP Growth (annual % change) 5.2 5.1 2.2 0.2 6.1 Inflation rate (%) 2.2 2.5 4.7 2.8 4.1 Unemployment rate (%) 3.8 3.3 3.2 3.7 2.9 Current account balance (% of GDP) 0.6 0.6 -0.7 3.1 2.5 [*Projected] Table 2: Japan’s Macroeconomic Indicators 2006 2007 2008 2009 2010* GDP (US$ billion, PPP) 4080 4297 4358 4146 4310 Real GDP Growth (annual % change) 2.0 2.4 0.7 -6.3 2.9 Inflation rate (%) 0.2 0.1 1.4 -1.4 -0.7 Unemployment rate (%) 4.1 3.5 4.0 5.1 5.2 Current account balance (% of GDP) 3.9 4.8 3.2 3.4 3.8 [*Projected] Source: Organisation for Economic Co-operation and Development, Economic Outlook 2010 Extract 3: South Korea in dispute over withdrawal of stimulus South Korea's finance ministry and central bank appear on a collision course over when and how to exit economic stimulus measures, with signs of a growing recovery in Asia's fourth-biggest economy. The Ministry of Strategy and Finance, which is leading the country's crusade to emerge from the global slowdown, cautions against ending economic stimulus measures, citing a fragile recovery and unemployment. [Turn over

4 But the Bank of Korea (BOK), which makes taming inflation its top priority, insists on raising benchmark interest rates in order to curb cons umer price hikes and prevent bubbles in the asset markets. Bowing to the government pressure, however, the committee decided to keep its key interest rate unchanged at a record-low 2 per cent for an 11th month, a move welcomed by the finance ministry. The bank slashed the policy rate by a total of 3.25 percentage points over four months from October 2008 to a record low of 2 per cent to shield the export-driven economy from the fallout of the global financial crisis. For its part, the government has taken a series of stimulus measures, highlighted by a 28.4 trillion won (U S$25.1 billion) supplementary budget and tax cuts aimed at bolstering consumption and corporate investment. “Given the expected strength of output growth in 2010, it is important that the Bank of Korea not fall behind in withdrawing monetary stimulus given the risks of keeping the benchmark interest rate too low for an extended period of time. Also, the prompt withdrawal of fiscal stimulus in 2010 will help the government meet the medium-term fiscal plan of reducing budget deficits”, added Kim Sang-jo, an economics professor at Seoul's Hansung University. Source: United Press International Asia, 08 January 2010 Extract 4: Hitachi, Mitsubishi edge towards groundbreaking merger Hitachi Ltd and Mitsubishi Heavy Industries Ltd have begun talks to merge, a move that would bring much needed consolidation to corporate Japan. A combination of two of Japan’s oldest, most established conglomerates would mark a deeper embrac e of mergers as a tool for corporations to squeeze costs, combat a surging yen and gain com petitive scale. Bolstering global competitiveness has become a more urgent task as Japanese companies lose market share to companies from elsewhere in Asia. Their low profitability in particular makes it difficult for them to engage their Asian rivals in price competition. Both companies have been weighed down for years by high cost structures, a shrinking domestic market and excess capacity, making it a struggle to make a profit for years. Hitachi, Japan’s biggest industrial electronics firm, turned its first net profit in five years in the year ended in March and is still trying to reduce the size of its sprawling empire of 900 group firms. It has lost $14.3 billion in the last 10 years, compared with rival General Electric, which generated net profit of $160 billion in the same period. Mitsubishi Heavy, the nation’s leading heavy machinery maker, remains saddled by losses on its jet and shipbuilding operations. A merger would create a $150 billion revenue infrastructure firm second globally only to GE, and could provide impetus for cost cuts essential if the two companies are to thrive in an environment with the yen trading at around 77-79 yen to the dollar. However, it is not all cheer at the companies. Managers will likely have to seek the understanding of their workers before any agreement is reached because doing so could result in the closure of some units. Some skeptics believe that combining the businesses, if it comes to pass, will simply create a muddle. Hitachi has some of the world's most impressive green-energy technologies, but they are lost in a corporate structure ill-equipped to exploit them. Yet the moves are too little too late; the company holds on to poorly-performing units for far too long, and only takes action when there is a crisis. Source: Reuters, 4 August 2011

5 Questions (a) (i) Identify the trend in unemployment rate for Korea and Japan from 2006 to 2010. [2] (ii) Account for the projected change in Korea’s unemployment rate. [4] (b) Extract 2 mentioned that “deflation will persist”. Explain the term “deflation” and how it can affect Japan’s economy negatively. [6] (c) With reference to the case study, discuss the view that Korea should change its existing macroeconomic policies. [8] (d) With reference to the data provided where appropriate, discuss whether the proposed merger of Hitachi and Mitsubishi should be encouraged. [10] [Total: 30 marks] [Turn over

6 Question 2 Freer trade and investment: Beneficial or not? Figure 1: Brazil’s Current Account Figure 1 -60 -40 -20 0 20 40 2006 2007 2008 2009 2010 Year Brazil's current account balance (bil. $US) Figure 2: Vietnam’s Current Account Figure 2 -15 -10 -5 0 2006 2007 2008 2009 2010 Year Vietnam's current account balance (bil. $US) Source: The Worl