IJC_H1_ECON_CASE_STUDY_Q2

2011 H1 Prelim 2 Q2 (a) (i) Compare the GDP growth of US and China from 2007 to 2009. [2] Both the US and China experienced a falling GDP growth from 2007 to 2009. However, US slipped into negative GDP growth in 2009 while that of China’s was still positive. (ii) Explain possible reasons for the trends observed above. [4] US was experiencing a downturn earlier in December 2007 which deepened due to the impact of financial crisis in September 2008. The crisis led to severe loss of investors’ and consumers’ confidence and hence further contraction in aggregat e demand which eventually led to a fall in GDP. China, being dependent on the US and Europe as their export markets and source of FD I, experienced a decline in export growth and FDI inflows and hence GDP growth as well. China’s GDP growth was positive due to their ability to implement the appropriate measures to mitigate the negative impact of the global recession. For example, Chin a’s domestic consumption and investment could have offset the dec line in export growth, maintaining their aggregate demand at a suffici ent level and hence their GDP growth was still positive. (iii) With reference to the data provided, explain the relationship between GDP growth and unemployment. [2] In general as GDP growth declines, th e unemployment rate rises. This is seen in US and other countries in Europe whereby a recession triggered by a fall in aggregate demand prompts firms to reduce their demand for labour in view of lesser production. (b) Explain the impact of globa l recession on the poor countries’ balance of payments. [6] The global recession has adversely impacted the output and national income of many economies. This has affected the poor countries’ balance of payments in three different ways. Firstly, with the global recession, business expectations become weaker as expected returns from in vestments are lowered. As net private capital flows from developed c ountries fall, the capital inflows into the poor countries declines, l eading to a worsening of the capital and financial account of the balance of payments. Secondly, with the global recession, production in many economies is reduced and hence the demand for ra w materials and intermediate goods for production falls leading to a fall in commodity prices. As mentioned in Extract 3, mo st poor states are dependent on

commodities as their main sources of export revenue. With the fall in commodities prices and output their export revenue will fall significantly, worsening the balance of trade and hence current account of the balance of payments, ceteris paribus. Lastly, many of these poor countri es also export workers to the developed countries. With the falling demand for labour in the developed countries, many of these workers are likely to be retrenched. Hence, they are unable to send back remittances. Some countries depend