ACJC H1 ECON P1

©ACJC Preliminary Examinations 2011 H1 Economics 8819/01 1 SECTION A Answer all questions in this section. Question 1 Research & Development (R & D) Extract 1: The importance of R&D, intellectual works and innovations The importance of R&D, intellectual works and innovations has been much debated in recent years. Software companies develop new programmes and applications for entertainment or professional activities, new and more effective drugs are discovered by pharmaceutical companies and artists write books and songs to entertain their fans. Entrepreneurs would not invest money in innovation if it were not for the prospect of earning large profits. But if an innovation can be copied and reproduced by other firms, the original inventor is unlikely to recover the money invested in creating new products, as the competition by the firms that have “borrowed” their ideas will drive the price down to the marginal cost of production. Given that the social rates of return to R&D are substantially above private rates of return and their paramount importance to foster econo mic growth and increase consumers’ utility, these provide the main justifications for government subsidies to R&D. In an effort to increase their level of innovation, many countri es have turned to fiscal incentives for R&D, often involving substantial sums of taxpayers’ money. Intellectual works have also received protection through intellectual property (IP) laws, in particular in the form of copyrights and patents. IP laws are necessary as ideas, once invented, can be imitated by others. Patents are granted rights provided to manufacturers or innovators in different fields, for example the pharmaceutical industry, to exclude others from making or selling the innovation. These patents usually last for a period of time before it expires. Many countries aim to grant patents only to innovations that were useful and genuinely novel, but many are also struggling to determine which innovations are really worth being patented. Although patents have its drawbacks, one cannot deny the importance of patents to protect one’s innovation. Adapted from How Important is Business R&D for Economic Growth and Should Government Subsidise it? Rachel Griffith, IFS, 2000 Extract 2: Singapore - Drugs not working, biomed still down Anyone holding their breath for the long-awaited rebound in the important but highly volatile pharmaceutical industry could be disappointed. The indications are that the sector – a star performer in recent years – may not provide the much-needed shot in the arm to local manufacturing any time soon. Expiring drug patents, delayed approvals for new treatments and the rise of generic drugs are clouding the industry’s immediate outlook, says the Singapore Government. An MTI statement said the short-term outlook for biomedical output will be weighed down by strong competition from generic drugs and delays in approvals for new pharmaceuticals. The companies that operate plants here are global companies like GlaxoSmithKline and Schering-Plough, which invent and make their own drugs. But as patents for popular products run out, companies making copycats have been giving the big boys a run for their money. Analysts also noted that with the sma ll number of big players here, of which one is said to account for 40 per cent of the industry’s output, company-level issues can have vast effects on industry figures – or even those of the economy. A company going bust can actually derail the economy and cause problems in the job market. Adapted from The Straits Times, Thursday, 14 June 2008

Extract 3: A Competitive Economy In 2011, MTI (Ministry of Trade and Industry) stated that they will continue to support the Economic Strategies Committee’s goal of ma king skills, innovation and productivity the basis for attaining sustained economic growth of 3-5% for Singapore in the next decade. They will continue to invest in raising the capabilities of companies, and grow the talent base to support industry development. Further, MTI will step up efforts to nurture innovation capital by investing in R&D to drive higher value-add economic activities. Productivity is critical to Singapore’s sustainable long term economic growth, and to the improvement of standards of living for our people over time. The competitiveness of our industry clusters also needs to be supported by a strong intellectual and knowledge capital base. The government has allocated $16.1 billion to boost research, innovation and enterprise over FY2011-2015. Of this, MTI has been allocated $9.26 billion to promote research and innovation-driven growth. The aim is to grow Gross Expenditure on R&D to 3.5% of GDP by 2015, through increased private sector R&D expenditure. Adapted from Singapore Budget 2011 Table 1: Singapore’s Multifactor Productivity: Contributions to Growth in Real GDP 1997 2002 2003 2004 2005 2006 2007 Percentage Change in Real GDP 8.0 4.1 3.4 8.6 7.0 7.9 7.4 Contribution to Real GDP Growth (percentage points) by: - Capital Input 5.2 1.7 1.4 1.7 1.6 2.1 2.8 - Labour Input 2.8 -0.7 -0.6 0.8 1.9 2.9 3.7 - Multifactor Productivity * - 3.1 2.6 6.1 3.5 2.9 0.9 Source: Singapore Department of Statistics *:  A  change  in  multifactor  productivity  reflects  the  change  in  output  that  cannot  be  accounted  for  by  the  change  in  combined  inputs.  As  a  result,  multifactor  productivity  reflects  the  joint  effects  of  many  factors  including  new  technologies,  economies  of  scale,  managerial  skill,  and  changes  in  the  organisation  of  production.    Figure 1: Gross Domestic Expenditures on Research & Development, 1990-2004  Year  Gross Domestic Expenditures on R&D  (billion dollars)  Source: Organisation for Economic Co-operation and Development, “Main Science and Technology Indicators” (2006) ©ACJC Preliminary Examinations 2011 H1 Economics 8819/01 2

©ACJC Preliminary Examinations 2011 H1 Economics 8819/01 3 Questions (a) (i) Compare gross domestic expenditures on R&D between Singapore and China from 1994 to 2004. [2] (ii) What can you conclude about the relative importance of multifactor productivity to Singapore’s real GDP growth over the period 2002-2007? [2] (b) With reference to the data, (i) With the aid of a diagram, explain the impact on the drug market when its patent expires. [3] (ii) Identify the type of externality that exists in the pharmaceutical industry and explain how it leads to inefficiency in resource allocation. [5] (c) Discuss whether patents are better than subsidies in encouraging innovation in the pharmaceutical industry. [8] (d) In the light of the data provided, evaluate the importance of innovation in achieving sustained economic growth for Singapore. [10] [Total:30]

Question 2 The Debt Crisis in Europe Extract 4: Greece’s Painful Road to Economic Recovery Greece came under International Monetary Fund (IMF) supervision of its own will on 9 May 2010. That is when a memorandum of understanding between the government, the IMF, the European Central Bank and the European Commission passed into law, binding the Greeks to reform their economy in return for €110 billion over three years. With each instalment, the Greeks have to prove that they have taken specified steps to cut its budget deficit. The Greek government called its restructuring pl ans the most ambitious fiscal adjustment ever undertaken by a European country. The gambit is to eradicate a €29.2 billion deficit over three years – no small feat for an economy which is now over €292 billion in debt. The government twice raised consumer taxes like VAT (from 19% to 23%), twice reduced public sector salaries and increased taxes on fuel, alcohol and tobacco. Other austerity measures announced in May 2010 included a three-year freeze in public sector pay and state pens