IJC_H2_ECON_Q6

2011    H2 ECONOMICS PRELIM 2 ESSAY Q6            a) Analyze the impact of globalization on the balance of payments. [10] Command  Content  Context  Analyze  Impact on BOP  Globalization    Increases in Trade Activity-> Greater reliance on trade Recession in trading countries (E.g. 2008 Worldwide recession) ->In trading countries ->Decrease in economic growth and employment -> Decrease in income level -> Decrease in purchasing power -> Decrease in consumption of goods and services -> Decrease in demand for imports ->In domestic country -> Decrease in demand for exports -> Fall in export revenue -> Fall in net export -> Persistent decrease will lead to a deficit and trade and service balance -> Deficit in the current account of BOP *Greater effects for economies producing income elastic exports Increases in Trade Activity-> Greater reliance on trade Inflation in domestic country (E.g. India, China) -> Increase in general price level -> Increase in price of domestically produced goods and services ->Exports -> Price of exports will be relatively more expensive -> PED>1, due to availability of substitutes from trade ->Qdd of exports will fall by more than proportionately -> Decrease in export revenue ->Imports -> Fall in quantity demanded of domestically produced goods -> Increase in demand for imports -> Increase in import expenditure ->Net export -> Overall fall in net export -> Worsening of trade and service balance -> Persistent worsening will lead to a current account deficit in the BOP *Dependent on the cross elasticity of demand a) Analyze the impact of globalization on the balance of payments. [10] b) Assess whether exchange rate policy is the most effective policy in managing the balance of paymentsin the light of a rise in globalization. [15]

2011    H2 ECONOMICS PRELIM 2 ESSAY Q6    Increases in Capital Flow -> Greater reliance on trade Relatively lower interest rates (E.g. USA vs China or Australia) -> Foreign countries having a relatively higher interest rates -> Higher rates of return for portfolio investments -> Profit maximizing investors invest attracted to short term capital investments overseas -> short term capital outflow for domestic economy -> Persistent outflow will lead to a deficit in the capital and financial account -> Leads to a BOP deficit Increases Labour Mobility-> Greater reliance on foreign Talents (E.g. Singapore) -> Small economy with a lack of natural resources ->Labour as only resource -> To increase productivity and capacity -> Increase foreign labour/ talent -> Income earned is remitted to their own country -> Wages remitted is considered as an outflow via the unilateral transfer -> Persistent outflow will lead to a current account deficit in the BOP     L3 For an answer that uses analysis to underpin discussion on the causes of BOP deficit in different economies via different accounts of