TEMASEK JUNIOR COLLEGE PRELIMINARY EXAMINATION 2007

ECONOMICS HIGHER 2 PAPER 1

TUESDAY 18 SEPTEMBER 2007

9732/01

1400 1615 HOURS

READ THESE INSTRUCTIONS FIRST Write your CG and name on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Do NOT turn over this page until you are told to do so.

Answer all questions. At the end of the examination, fasten all your work securely together with the string provided. The number of marks is given in brackets [ ] at the end of each question or part question.

This question paper consists of 8 printed pages. [Turn over

2007 Preliminary Examination / Economics H2 9732/01

Answer all questions.

Question 1 Extract 1: Global Warming and the Kyoto Protocol Global temperatures seem to be rising, which can lead to rising sea levels and greater incidence of extreme weather all over the world. Environmentalists point to a build-up of greenhouse gases, especially carbon dioxide, with the burning of fossil fuels for energy as the main cause. Given that greenhouse gases stay in the atmosphere for up to 200 years, reducing the emissions of such gases will help slow down the processes of global warming. Figure 1: Emissions of Carbon Dioxide* Total yearly emissions (billions of tons)

On Dec 11, 1997, 39 of the world's developed countries made an agreement at a United Nations meeting to curb greenhouse-gas emissions at Kyoto, Japan. The Kyoto protocol, aimed to reduce by 2008 to 2012, the emissions of greenhouse gases to levels that will be on average 5.2% lower than the 1990 levels of the participating countries. One problem with the treaty is that USA, the biggest carbon emitter in the world, has refused to take part. One of the key reasons for the US absence is that developing countries such as China have not been included in the treaty. The American argument is that the treaty will allow such countries to get a free ride on emissions reductions.

*from consumption and flaring of fossil fuels Source: Economist.com, Emissionary Position, 7 Jun 2007

However, the UNs view is that the developed world had created much of todays problem by emitting greenhouse gases while industrialising over the past century hence it is only fair that such countries act first to curb emissions. The developing countries can do their part at a later stage when they are more ready.

Adapted from: Economist.com, Backgrounder on Global Warming, 14 March 2007 & The Economist,
Oh No Kyoto, 5 April 2001

2007 Preliminary Examination / Economics H2 9732/01

3 Extract 2: Energy Consumption in Singapore

In 2000 the World Economic Forum (WEF) ranked Singapore 25th out of 45 countries in terms of "energy intensity" i.e. the amount of energy consumed per dollar of GDP. This ranking could be contributed by the fact that as a tropical city-state Singapore depends heavily on air-conditioning to cool its buildings all year round. In contrast, higher-ranked temperate countries usually only require heating from late autumn through winter and air-conditioning only during the hottest days in summer. Furthermore, unlike many larger developed countries, Singapore is fully urban and has no rural base.
Figure 2: Average Monthly Electricity Consumption

Source: IACEE Report May 200

Singapores energy needs have grown in tandem with its economic growth. Over the period 1980-1995, the annualised growth in energy consumption was 11.9% while the average annual growth in GDP over the same period was about 7.6%.
Adapted from: Inter-Agency Committee on Energy Efficiency (IACEE) Report May 2000

Extract 3:

Promoting Energy Efficiency in Singapore

In 2002, the National Environment Agency introduced a voluntary Energy Labelling Scheme for air-conditioners and refrigerators. The labels provide energy performance information to help our consumers choose energy-efficient models and thus save on their energy bills. As of January 2006, 121 air-conditioner and 77 fridge models were labelled, representing 27% and 20% of available models respectively. From mid-2007, it will be mandatory for all air-conditioners and refrigerators to carry energy-efficiency labels. This will allow consumers to make informed choices on appliances whose energy consumption form a significant part of their utilities bill. The possibility of expanding the labelling scheme to include other energy-intensive appliances such as clothes dryers, dishwashers and water heaters will be further looked into.

2007 Preliminary Examination / Economics H2 9732/01

4 Table 1: Sources of household energy consumption in Singapore Sources of Consumption Air-conditioning Refrigeration Contribution from source 33% 25% Source: IACEE Report May 2000

Other than mandatory labelling of such devices, there are also other measures in place to promote efficient energy usage.
Figure 3: Sources of energy consumption in Singapore

HDB Flats

Source: IACEE Report May 2000

The Energy Smart Buildings Scheme, aims to promote the active management of energy use by inviting office buildings to apply for an award that recognises those in the top 25% in terms of energy efficiency. The energy bill is typically a buildings single largest operating expense. To apply for the award, owners need to engage an accredited appraiser to audit their buildings for energy efficiency and the quality of the indoor environment. To promote the purchase of green vehicles such as compressed natural gas (CNG) and hybrid vehicles, the Green Vehicle Rebate has been doubled. After a year since the implementation of the higher rebate, the number of green private have increased from 26 in 2005 to 594 by end 2006. Total private car population has increased from
438,197 to 472,306 over the same period. Adapted from: Statement by Minister MEWR, COS Debate, 7 March 2006 & National Climate Change
Committee website www.nccc.gov.sg

2007 Preliminary Examination / Economics H2 9732/01

Questions
(a) (i) Referring to Figure 1, compare Chinas emission of carbon dioxide with other countries emissions. How does the data in figure 1 relate to USs argument for not participating in the Kyoto protocol? [3]

(ii)

[3]

(b)

(i)

Compare the monthly household electricity consumption for different flat sizes from 1987 to 1997. Explain possible reasons behind the trends described above.

[3] [6]

(ii)

(c)

Using the relevant economic concepts and diagrams, explain why global warming is an example of market failure.

[5]

(d)

Discuss the effectiveness of policies that Singapore has implemented to reduce energy consumption and combat global warming.

[10]

Total : 30 marks

2007 Preliminary Examination / Economics H2 9732/01

Question 2

Extract 1: Will the rising yuan solve Chinas problems? Despite the yuans appreciation of around 7% since it was un-pegged to the US$ in mid-2005, China's trade surplus with America increased to $233 billion last year, accounting for almost 30% of America's total trade deficit and its foreign-exchange reserves continued to grow. In the first three months of this year, China added $135.7billion worth of foreign currency to its reserves, compared with $247.3 billion for all of 2006. Relations between China and America have been getting tense due to the alleged flow of cheap Chinese goods into American markets. Some policy makers in America would like to see the yuan rise by double digits and have threatened trade sanctions if that does not happen. In fact, some sanctions have already started. Last month, America slapped anti-dumping duties on high-gloss paper from China in response to a complaint from domestic manufacturers. It has also filed a complaint at the World Trade Organisation against Chinese pirating of DVDs and CDs.
Fig 1: Exchange rate index of the yuan

Fig 2: Chinas trade surplus in goods (US$)

The Chinese government may themselves be also considering a faster appreciation of the yuan to cool down the overheating economy. It announced late last week that economic growth stood at an annualised rate of 11.1% in the first quarter of 2007. Despite past tightening of interest rates and credit conditions, the economy has yet to cool down. Raising the yuan could help China let off some economic steam and control its runaway growth. Its not clear how much a higher yuan will affect its trade balance. China is merely an assembler for many its exports with parts made and imported from elsewhere. Such manufacturing accounts for more than half of all exports in China. China also has a huge growing domestic demand that is sucking in imports in the process. Rather than for consumption, much of such imports are in the form of raw materials like fuels, metals, timber and capital goods that are needed to feed the Chinas investment boom. Adapted from: Economist.com, Breathing fire, 24 Apr 2007
& The Economist, Lost in Translation, 17 May 2007

2007 Preliminary Examination / Economics H2 9732/01

7 Extract 2: Investing in China is not as cheap as it once was Most industrial development in China has taken place in the country's eastern coastal regions, particularly around Shanghai and near Hong Kong. But costs in these areas are now rising sharply. Office rents are soaring, industrial land is in short supply and utility costs are climbing. Most significant of all are rocketing wages. In spite of the mass migration of workers from China's vast interior to the coast, pay for factory workers has been rising at double-digit rates for several years. In 2005 average wages for a factory worker came to almost $350 a month in Shanghai and $250 a month in Shenzhen. By comparison, monthly wages were less than $200 in Manila, around $150 in Bangkok and just over $100 in Batam, Indonesia. One solution is for companies to move into inland China. While this raises transport costs for exporters, other costs are much lower. In 2004 American chipmaker Intel decided to invest in a new plant in the inland city of Chengdu, about 1,600km away from Shanghai. The company's decision was influenced by generous government incentives and significantly cheaper land and utilities. However other firms like Flextronics, one of the worlds largest contract manufacturers for consumer electronics like computer printers, still has all its China factories located along the eastern coastal provinces. With rising costs in China, many firms are looking at investing more in other parts of Asia. Hong Kong-based shoemaker Yue Yuen is the world's largest contract shoe manufacturer. It produces trainers and casual footwear for brands like Nike and Adidas with most of the shoes bound for America and Europe. With each shoe passing through up to 200 pairs of hands on the production line, Yue Yuen's operations are highly labour-intensive. In China the firm is experiencing rapid wage inflation and although productivity is rising, labour costs in Vietnam and Indonesia can be as much as 35% lower than in coastal China. While production is increasing at the firm's factories in China and Vietnam, output in Indonesia is growing the fastest.

Nevertheless, China still has one key advantage. With its 1.3 billion people, 10% yearly growth rates and a vibrant emerging middle class in the big cities, China offers huge potential. ASEAN with 560m people also offers a big population. However, the problem is that ASEAN nations have yet to form a single market. While the region offers plenty of opportunity for export-based manufacturing, as a single market it remains highly fragmented. Companies want to be able to set up one factory to serve the whole region, but numerous barriers prevent them from doing so. Governments in the region have announced bold plans to create the ASEAN Economic Community by 2015, with a free flow of goods, services and investment. While removing tariff barriers, which are currently below 5% in general, may not be that difficult, the removal of non-tariff barriers could pose more of a problem, as this requires the harmonising of thousands of industry standards and customs regulations, and the setting up independent bodies to govern regional trade and mediate in disputes.
Adapted from: The Economist, The problem with Made in China, 11 Jan 2007

2007 Preliminary Examination / Economics H2 9732/01

Questions

(a)

(i)

Referring to Figure 1, describe the trend in the yuans trade-weighted exchange rate from 1994 to 2007.

[3]

(ii)

How would the merchandise trade balance be affected by the tradeweighted exchange rate?

[2]

(iii)

To what extent does the data support the relationship described above?

[2]

(iv)

Explain two other factors that can affect the merchandise trade balance?

[4]

(b)

How could the trade sanctions imposed by the Americans help reduce its trade deficit?

[6]

(c)

Discuss the effectiveness of a further appreciation of the yuan in helping China to resolve its overheating economy?

[6]

(d)

With reference to extract 2, discuss the factors influencing the decision of a foreign manufacturer regarding where to invest in Asia.

[7]

Total : 30 marks

2007 Preliminary Examination / Economics H2 9732/01