IJC_H2_ECON_CASE_STUDY_Q2

2011 H2 Prelim 2 Q2 (a) (i) Compare the GDP growth of China and India from 2007 to 2009. [2] Both are GDP growth of China and India are declining. However, the growth rate of China remains higher than India’s. (ii) What evidence is contained in the data to suggest that Asia did not “decouple” from the West? [2] The growth rates of China and India moves in tandem with that of the US Germany. As US and Germany experi ences a slowdown in their growth and moves into a recession in 2009, China and India’s growth rates declined as well. (b) With reference to the data, explain why the changes in unemployment rates differ from country to country. [4] Possible reasons: Extent of the slowdown in the economy is one possible reason accounting for the variation in the changes in the unemployment rates between countries. E.g. US economy contracted, thereby leading to a more significant decline in demand for labour and rise in unemployment while those of other economies like China and India, are still growing, though at a slower rate Degree of flexibility of the labour market is another factor accounting for the variation in the changes in the unemployment rates. For instance, Germany did not experience a rise in unemployment though it had similarly experienced negative gr owth like the US in 2009 as its labour markets was more rigid, hence its demand for labour did not fall as significantly as the fall in output. (c) Explain why governments should cut their “spending on keeping people in old jobs”. [4] Spending on keeping people in old jobs is appropriate if the objective is to minimize cyclical unemployment. As highlighted in Extract 2 the old jobs might no longer be in existence even as the economy recovers and th is form of spending will inevitably place a burden on the government’s budget in the long term.

Governments should cut their spending on keeping workers in jobs that are no longer required and focus their spending on restructuring their economies and providing training to equip the workers with a new set of skills to adapt to the changing demands of their economies. More beneficial in enhancing productive capacity of the economy and thus economic growth in the long run (d) Discuss the extent to which global current account imbalances are the result of “the surplus countries’ inflexible exchange rate regimes.” [8] The global current account imbalances occurs when some countries run high current account surpluses while other countries run high current account deficits. Global current account imbalances are the result of inflexible exchange rate regimes of surplus countries like China Under its inflexible exchange rate regime it is possible that Chinese authorities have been intervening in the foreign exchange market, thereby holding the value of the Yuan lower to gain an advantage for its exports. A lower value of th