Victoria Junior College Answers to 2010 JC2 CT2 H2 Economics Section A (CSQs): CSQ1: (a) (i) Compare the

GDP growth for Singapore and the UK from 2003 to 2009*.[2] Version 1(the original version): Throughout 2003 - 2008, Spores GDP grew faster than the UKs [1] Both countries experienced a sharp fall in GDP in 2009 with Spores GDP fell more sharply than UKs [1] Version 2 (just a variant of Version 1): GDP rose for both Spore and UK from 2003-2008 and fell for both in 2009*[1] Magnitude for both rise or fall in GDP greater for Spore than UK.[1] Version 3 (If students take growth to mean what the rate is like): GDP growth for Spore higher than UK for 2003 2008.[1] [must show comparison to get the mark] GDP growth for Spore and UK were both positive from 2003-2008 and negative for 2009.[1] All agree?

(ii) To what extent does the data in Figure 1 and Table 1 explain your answer in (a)(i)?[4] Yes: The fact that Figure 1 shows both trade and GDP increased together from 2003 2008 and fell together in 2009. or trade grew more rapidly than GDP for 2003-2008 and forecasted to fall more sharply than GDP in 2009 means trade could be an important factor behind GDP growth [1] Thus, Spores high trade dependence shown in Table 1 explains why when her trade was growing, her GDP would grow faster than UKs [1] and similarly, when her trade plummeted in 2009, her GDP would also be expected to fall more sharply than UKs.[1] No: However, these the 2009 figures are forecasts which may not be realized if circumstances change.[1]

A limitation of Figure 1 is that it refers to world trade generally and may not fully account for the specific trade patterns of UK and Singapore.[1] (X + M)/GDP for UK is missing and thus comparison cannot be sufficiently made.[1]

Yes [3] + No[3] = 4 (b) Compare the problems that the Singapore and UK economies faced, based on the 2009 forecast. [2] Both faced similar problems of projected negative growth, rising unemployment and falling productivity but of different severity. On one hand, Singapores GDP was projected to fall more drastically (-8.8%) than UKs (-4.1%) and her productivity fell more severely too (-8.7% vs UKs -2.4%) while on the other hand, Singapores unemployment rate was rising slightly less than UK (by 1.4% vs UKs 1.8%) Inflation rate does not seem to be a problem for both economies as they both have low inflation below 1%. [1m for similarity in problems + 1m for difference in severity of problems] [Tutors to note: if student points to the similar low inflation rate, no credit should be given since the Q specifically asks fro problems.] (c) Discuss whether a rise in household savings rate isnt good news from an economic standpoint.[8] Yes: Given the weak US economy, it is likely to be operating below full employment. Based on the Keynesian theory, a rise in household savings rate isnt good news as it will cause income to fall by a multiple. Disposable income is either saved or consumed. A rise in household savings rate would thus mean a corresponding fall in consumption. One of the components of AE is consumption. A fall in consumption will cause AE to shift downward, causing income to fall, which in turn will cause consumption to fall further since it is a function of income. This will cause consumption in another industry to fall and output and income to fall further and so on. There is thus an eventual fall in output and income by a multiple of the initial rise in household savings or the corresponding fall in consumption. As domestic consumption is a significant component of USAs AD, the eventual fall in output or GDP is likely to be significant. [Students may also deduce the significant multiplier impact by referring to household savings rate crossed the 7% mark in mid-2009, the highest level since 1993 in Extract 1] Diagram can be used to show an initial equilibrium, then AE shifts downward, resulting in a multiple fall in output and income. Analysis using AD-AS model can also be used. No:

In the long run, savings are necessary to fund investment to achieve potential growth. A rise in household savings rate can thus be good news, especially if the economy has already reached its full employment capacity. A rise in savings can cause a fall in interest rate which can cause investment to increase, expanding the productive capacity and raise the full employment income level so that economic growth can occur without inflationary pressure. Conclusion: In the light of the poor sentiments, even though savings might be necessary in providing funds for investment, investments are unlikely to take place. The rise in savings due to loss of confidence is thus undesirable for the economy.

L1

L2

L3 E

Merely states that a rise in savings can cause a multiple fall in income &/or a rise in savings is necessary for investments required for potential growth, no elaboration. One-sided explanation of a rise in savings causing a multiple fall in income, with reference to the context of the economy operating below full employment Or Two-sided underdeveloped explanation of how a rise in savings can cause a multiple fall in income but can help to fund investments for potential growth in the long run. A balanced explanation of both sides, making explicit the contexts of operating below full employment, significant multiplier and/or long run. Take a stand without referring to the context Take a substantiated stand by referring to the context.

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(d) Explain why many feared trade restriction could cause a major downward spiral.[4] When a country starts imposing trade restrictions, its trading partner experiences a fall in exports revenue which in turn triggers a multiple fall in its income. The trading partner is thus likely to retaliate against the trade barriers by counter imposing trade barriers. The net result is a rapid contraction in world output and income by a multiple of the fall in exports revenue caused by the initial round of trade restriction, worsening the global recession which the trade restrictions were imposed to tackle in the first place. Even if the trading partner did not impose retaliatory tariff, it may no longer able to buy as much imports as before with a fall in its exports earnings. The country that started the trade restrictions will thus also face a fall in exports revenue/earnings and a multiple fall in its income. There is thus a major downward spiral in world output and income triggered by the first round of trade restrictions. Thus, Country A imposes trade restriction Fall in country Bs exports revenue fall in country Bs income by a multiple of the fall in exports revenue fall in country As

exports revenue fall in country As income by a multiple of the fall in exports revenue... If country B also imposes retaliatory tariff, the fall in country As exports revenue will be bigger and so on.resulting in a major downward spiral in world output and income. L1 L2 L3 Merely state the meaning of trade restrictions and/or how world trade 1 and output fall as a result of trade restrictions. Explain how trade restrictions cause world trade and output to fall, not 2 able to explain the downward spiral. Explain how trade restrictions cause world trade and output to fall 3 - 4 through a downward spiral, as a result of both feedback effect and retaliation by trading partners.

(e)

Both the UK and the Singapore governments have adopted a range of measures in response to the global downturn. Assess the relative impact of two measures on their economies.[10] Should identify the 2 measures adopted by each of the two countries and then compare and evaluate their impact on their economies in terms of the 4 macroeconomic indicators of actual /potential GDP, unemployment rate, inflation rate and current account / BOP position. Both adopted short term support measures to help their economies offset/mitigate the effect of the downturn (reduce the extent of the fall in actual GDP) or recover more quickly from it (reverse the fall in her actual GDP), and also have the foresight to put in place long term measures to grow their economies to achieve sustained growth. [its ok if students classify the measures differently as long as they are able to explain and evaluate them in some systematic/logical way] Short term measures 1. Spores Jobs Credit which subsidises employers wage bill (govt. grants for those earning $2500 and below) vs UKs provision of 1.7b to help families with consumption and/or fiscal support for employment vs UKs provision of 1.7b to help families with consumption and/or fiscal support for employment and investment Spores Job credit works by govt. paying part of the workers wage bill so that firms may be able to keep their workers longer (as their costs of production will be lowered) while waiting for the global economy to recover. Firms which face a permanent fall in demand for their products will find it difficult to sustain and will then restructure and shift their business to growing sectors. UKs funds to help families with consumption and/or fiscal support are aimed at increasing C through transfer payments and/or increasing G. Relative impact: -both countries measures are aimed at offsetting/mitigating the fall in actual GDP due to the downturn

For a small economy like Singapore, subsidizing employers wage bills to help workers keep their jobs may be more effective in mitigating the fall in GDP than transfer payments to boost consumption and/or govt spending on projects. Due to high leakages in her economy via high propensities to save and import, as well as her small C component, the multiplier effect of an increase in consumption arising from transfer payments and/or increase in govt spending will be limited. On the other hand, helping workers keep their jobs will prevent a fall in consumption caused by loss of income when jobs are lost, which can further prevent a downward spiral. For the UK, supporting consumption and/or increasing govt spending will work well as the multiplier effect is likely to be significant due to its high C as well as low leakages and hence high multiplier. -prevent unemployment rate from rising drastically vs reducing it For Spore, subsidising firms wage bill also help to prevent unemployment rate from rising drastically as such firms which have the potential to recover with some help will not be forced to close down. For UK, supporting C and/or increasing G will help to create jobs in the consumer goods industries and/or industries assigned to implement govt projects. The effects will spillover to other industries creating even more jobs and hence help to reduce the unemployment rate. -prevent possible deflation For Spore, by preventing C from falling as a result of loss of jobs, AD will not fall significantly and thus will not trigger a deflation which can in turn have negative impact on actual GDP and unemployment rate. For UK, raising C and/or G will help to raise AD, offsetting the fall in AD due to the downturn and thus deflation can also be prevented. 2. Spores SPUR vs UKs guaranteed job trainings or work placements for all 18 -24 year olds Spores SPUR aims to equip workers with the necessary skills so that they can move on to growing sectors and can also raise their productivity so that they are able to handle high-value jobs. UKs guaranteed training for 18 -24 year olds is targeted at helping young people unemployed for 12 months by training them and guaranteeing them jobs in socially useful activity. Evaluation: -Both measures will help to reduce structural unemployment by equipping workers with the relevant skills, preventing the unemployment rate from rising or reducing it. UKs scheme being targeted at the younger worker whereas SPUR is for all workers who need to upgrade their skills. Thus the UK scheme may help to reduce unemployment rate of only the younger workers. Or -Both help to prevent the unemployment rate from rising or reducing it but targeting different types of unemployment - while Singapores SPUR helps to reduce structural unemployment by equipping workers with the relevant skills, UKs work placement scheme is similar to creation of civil service jobs to solve demanddeficient unemployment (As part of this, the government will allocate funding to provide 100,000 new jobs in areas of dense unemployment across the country.)

[the 2 points below can also be classified under long term measures] -SPUR can also have the long term effect of increasing workers employability so that they continue to stay employed, helping to maintain low unemployment rate in the long run. -SPUR can also attract high-value investment by equipping workers with the right skills to handle high-value jobs and raising their productivity, which will in turn help to raise AD (via FDI) and hence actual GDP in the short run and expanding productive capacity to achieve potential growth in the long run. Such upgrading of skills is especially critical in helping Singapore achieve sustained growth in the light of increasing globalization and competition for trade and FDI from emerging economies. UKs scheme is meant to ensure no young people are left behind due to prolonged unemployment. It will help to reduce social problems that may arise if young people are not gainfully employed for long periods. This can in turn prevent social instability that may have significant impact in wooing foreign investors, promoting its potential growth. 3. Spores creative long-term strategies to grow the economy vs UKs 750 m Strategic Investment fund to support advanced industrial projects of strategic importance and package of reforms to attract FDI Spores measures are targeted at new growth areas to promote long term growth: anchoring global companies here (increasing capital accumulation via FDI), attracting talents (increasing labour) and nurturing home-grown enterprises (increasing entrepreneurs) help to increase the quantity of our factors of production SPUR & creating high-value jobs for locals (by raising their productivity) and maximizing resources such as land and energy help to improve the quality of our factors of production Global companies also bring with them their expertise and technology UKs measures are targeted at encouraging strategic investment which they may currently lack the expertise as well as attracting FDI to promote long term growth Or explanation of how the reforms work in attracting FDI and thus promote long term growth. Evaluation: -both countries long term measures are targeted at expanding their productive capacities to achieve potential growth so that their GDP can continue to rise. -Spore attracting anchoring global companies and UK attracting FDI can also help to raise the productivity of the workers and bring in expertise and new technology that can help both countries achieve sustained growth. In the light of Singapores drastic fall in productivity, creating high-value jobs is even more critical in increasing her productivity level so that she can attract high-value investment to help her shift into knowledge based economy faster. -Spores measures may also have impact on some other goals which are of specific importance given her constraints/circumstances.

Nurturing home-grown enterprises will also help her to cushion the effect of foreign investors pulling out in times of possible future global downturn so that there will be less fluctuations in GDP Anchoring global companies here and attracting talents can also help to create jobs and thus maintain low unemployment rate. Maximizing resource use such as land and energy will help Singapore achieve sustained growth despite her resource constraints.

-UKs measures to encourage FDI may serve more of a complementary role to her domestic investment in areas that she may lack the expertise in so as to help her achieve faster potential growth. Synthesis: Both countries have adopted short term support measures to solve their immediate problem by helping their economies mitigate/offset the effect of the downturn (reduce the extent of the fall in actual GDP) or recover more quickly from it (reverse the fall in her actual GDP). Both have the foresight to put in place also long term measures to grow their economies to achieve sustained growth. However, due to their different circumstances/constraints, the measures may be adopted for the same goals but with different focus and may have more impact on one economy than the other. L1 Merely identifies some of the measures adopted by the two countries but did not elaborate on how they work or how they might affect the two economies. and /or Merely states the 4 macroeconomic goals or indicators without using them to explain the 1 2 impact of any of the measures adopted by the two countries. L2 Briefly explains how two measures work in each country without explaining their impact 3 using the macroeconomic goals or indicators. Briefly explains how two measures work in each country and explain their impact using 4 at least 2 of the macroeconomic goals or indicators but explanation is underdeveloped. Did not compare the impact between the two countries. Briefly explains how two measures work in each country and explain well their impact 5 using at least 2 of the macroeconomic goals or indicators. Did not compare the impact between the two countries. L3 Briefly explains how two measures work in each country. 6 Explain and compare their impact on the two economies using at least 2 of the macroeconomic goals or indicators but explanation was underdeveloped and comparison was haphazard or disorganised. Briefly explains how two measures work in each country. 7-8 Explain and compare their impact on the two economies using at least 2 of the macroeconomic goals or indicators. Explanation was clear and comparison was explicit and organised Note: For scripts that cover only one measure in each country, the marks should be awarded accordingly. E Answer gives an overall assessment of the relative impact of the measures adopted by

the two countries, with reference to the macroeconomic goals and/or the extent they could be met.

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