IJC_H1_ECON_Q4

4a) Explain the causes of a deficit in the balance of payment. [10] Command Content Context Explain Causes of BOP deficit General No countries in context, encouraged to explain how the causes differ across different economies Cyclical Factors: Economic Growth/ Recession, Inflation Structural Factors: Cost structure Others: Exchange rate differences, government policies, interest rate 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 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 H1 Suggested Answers Question 4 a) Explain the causes of a deficit in the balance o f payment. [10] b) Assess the view that supply side policy is the b est policy to manage balance of payment in Singapore. [15]

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 L3 For an answer that uses analysis to underpin discussion on the causes of BOP deficit in different economies via di fferent accounts of the BOP 7-10 L2 An answer that undeveloped discussion on the cau ses of BOP deficit. Described only 1 single component of BOP. 4-6 L1 Descriptive knowledge and/or without link to Bal ance of payments deficit. 1-3 b) Assess the view that supply side policy is the b est policy to manage balance of payment in Singapore. [15] Command Content Context Assess Manage BOP Best Policy in Singapore Relating to the Small and Open economy, make comparison between