AJC H1 ECON P1

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. Section A Answer all questions. Section B Answer one question. 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 Question 3 / 25 Total Marks / 85 ANDERSON JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATIONS 2011 HIGHER 1 8819/01 ECONOMICS Paper 1 13 September 2011 3 hours Additional Materials: Answer paper [Turn over

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3 Section A Answer all questions. Question 1 A look at Japan Extract 1: 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 on a year-average basis, but to slow somewhat in the second half of the year. 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. The Bank of Japan should fight deflation through a strong commitment to keep interest rates at their very low current levels and to implement quantitative measures effectively until underlying inflation is firmly positive. Given Japan’s very hi gh public debt, the government should scale back expenditure increases in Financial Year 2011 and develop a credible and detailed medium-term fiscal consolidation programme, including tax reform, to bring the budget into balance. The Growth Strategy should focus on reforms that will boost productivity growth, particularly in the service sector, to improve living standards in the face of a shrinking working-age population. Table 1: 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 Gross fixed capital formation (% of GDP) 23.3 23.4 23.1 22.8 22.7 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 General government debt (% of GDP) 172.1 167.1 172.1 192.8 197.5 Public expenditure on health (% of GDP) 6.6 6.6 6.7 6.5 6.6 CO2 emissions from fuel combustion (million tones) 1202 1236 1247 1261 1279 [*Projected] Source: Organisation for Economic Co-operation and Development, Economic Outlook 2010 Extract 2: EU and Japan in trade dispute The European Union sent its dispute with Japan over subsidies to a World Trade Organization arbitration panel, saying efforts to negotiate an amicable solution failed. The EU has sought for years to force Japan to stop giving what the EU considers to be unfair subsidies in the form of export financing of various industries including shipping, semi-conductors and electronics by the government. In the case of rice farming, the Japan government has shielded rice farmers from international competition by paying farmers four times the market value for their rice. This costs Japanese tax payers nearly US$2 billion a year. Wh ile the opposition is quick to highlight the burden on the people, the government insists that su ch measures are current and necessary, given the global fears of food contamination from radiation and a looming global recession. Source: Various, 2011 [Turn over

4 Extract 3: Japan’s market for renewable energy Japan’s the latest country tying itself in knots tr ying to figure out how to promote clean energy and not break the bank in the process. The country’s government is squabbling internally over whether to offer even more subsidies to all Japanese firms that produces renewable energy. As a result, the future of the renewable market is unknown especially in the wake of the Fukushima nuclear disaster. With the government struggling to fund the estimated US$300 billion disaster recovery, some 447 out of more than 3000 programmes that receive some form of subsidy in Japan will be scrutinized by a special committee with the aim of cutting the fat. Japanese officials at the Ministry for Economy and Trade insist that subsidies for renewable energy are necessary. Without them, solar-power companies and wind farms do not have a long-term incentive to invest and produce more. And that is bad news for a country that strongly believes that renewable energy can supply a significant proportion of Japan's energy needs, creating many public benefits for the nation and its regions, including regional economic development benefits such as the rise of renewable energy industries which leads to jobs creation and even opportunities for export growth. Furthermore, they also expand wo rk indirectly in local support industries, like banks and construction firms. On the other side of the globe, the western countries such as the US have also struggled with their own set of problems in promoting renewable energy . In the US, the Senate has tried and failed six times to extend tax incentives for renewable energy like wind and solar power; the drive keeps getting derailed by wider fights over the budget. Bu t even without fresh government support, some clean energy like wind power is still going ahead. Not enough, though, counter many clean-energy advocates. They say long-term government support is crucial if the US hopes to jumpstart an alternative energy sector that can help fight global warming. Adapted from The Wall Street Journal, 25th September 2010 Questions (a) (i) Describe the trend in unemployment rate for Japan from 2006 to 2010. [2] (b) Extract 1 mentioned that “deflation will persist”. (i) Explain the term “deflation”. [1] (ii) Explain how deflation can affect Japan’s economy negatively. [5] (c) With reference to Extract 2, discuss the extent to which subsidies improve Japan’s balance of trade. [6] (d) (i) Explain why the market under-produces renewable energy. [6] (ii) With reference to the case study, discuss how the use of subsidies and other appropriate policies can correct this market failure. [10] [Total: 30 marks]

5 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 World Bank Extract 4: Trade and investment between Singapore and Brazil Trade ties between Singapore and Brazil will get a boost, after the two countries signed an agreement on trade. Singapore is Brazil's sixth trading partner in Asia. Trade between both sides has grown steadily over the years, benefitting cons umers in both countries as they are able to buy greater variety of goods. In the past five years, trade volume has surged by 230 per cent, making Brazil Singapore's largest trade partner in South America. Meats continued to contribute with the greatest number of products exported among the ten leading ones, with four categories. This was due, mostly, to a growing effort of Singapore to diversify its markets towards new continents, with the aim of curbing the