PJC Case Study Trade Qn.pdf

7/28/2019 PJC Case Study Trade Qn.pdf

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6Question2 GlobalFinancialCrisisExtract4: Bank of England'sdilemma:A housepricecrash or soaring nflationWhichwouldyourather ace:a recession nd housepricecrashor yearsof soaring eventies-style nflation?For he pastdecade,nflationwas keptunusuallyow by the influxof cheapgoods romChina.This meant he Bank of England UK'sCentralBank)could keep interest ates ow withoutdriving nflationhigher.But as China'sappetite or energyand food ballooned, o have hepricesof oil,wheat,meatandmostother mportant taplegoods.It has comeat the worstpossible ime: he crunch n creditmarketshas pushedup familbs'mortgageates interest ateon home oan).The UK economys facing he sharpest loMownin 16yearsand he outlook or he housingmarketandproperty rices s at itsworst.In normalcircumstances,he Bankof Englandwould havealready ut the official nteret rdefar and ast,hoping enderswould ollowsuitwith he rateof theirhome oans.However, olgso wouldrisk pushingup inflation,which s alreadystubbornly bove he targetset. t mghtseem emptingo let nflation o andputoff the immediate ain,but hiscouldbe poisonousiorthe economyn the long-run.Some udiciousnterest atecuts will help soften he economicslowdownwhilekeeping nflationn check.However, espitehavingcut the official ate hreetimes n the past ive months, he mortgage ates acedby households ave actually isenbyaround .25percent.

Source:Telegraph,24 pr2ffiExtract 5: Dent n Singapore's inancial hub dreamDespite ts limitedexposure o the toxic securitizedinancialproductswhich had blonnr fgholes n Westernbanks'balance heets,Singapore's conomys in a badway.That'sbecauseits economicgrowth is still highly relianton commercial rade, with merchandise xportsrepresenting ver 22Oo/of gross domesticproduct(GDP),according o a CreditSuisseresearch eport. Typically,around 20o/o f those shipmentsare destined or US markeb,makingSingapore's conomic rowthhighlycorrelatedo America's erformance,ccordingothe same research. s such, Singapores already echnicallyn recession, herea slump nexports ushed uarterly rowth nto negativeerritoryor he secondquartern a row.Third-quarterrossdomesticproduct GDP)contracted .3% from the previous uarter.TheMinistryof Tradeand Industry eviseddown ts full-yeareconomicgrowth orecastdown or thesecond time this year, recently rimming ts projection o "around3%" from 4To to Sofopreviously.Meanwhile,nflation arlier hisyear reached 26-year ighandconsumer ricesare on paceto risebetween % and 7% thisyear,accordingo the Monetary uthority f SingaporeMAS).Singapore'sNationalTrade UnionCongresshas (NTUC)warned hat retrenchment il l risenextyearas business ontinueso deteriorate.Singapore's bility o maintain position s a global inancial ub- alreadyhe world's argesfrprivatebanking enternext o Switzerland will also ikely equirea rethinkn the wakeof thecrisis, omeanalysts ay.The decline n stockmarketwealthacross heglobemeans he needfor wealthmanagers ndprivate ankerswill declinen themonths,f notyears,ahead.

Source:AsiaTimes, Nov2008


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7Ileglobalisation

casnc meftdown as popura:,^new term:degrobatisation.toba*sation eans he

r*'-ili,.i'n"movbment" n"lol,i ;?p't"r^t"x",i"$||::!fiqjj^??'p."H19Jiiti!?^'n"''"r*nurtrichcountriesthaF '# - *'oT'fiJ it"nuta"tu'iig't:'lupposeoty';;;

activityhan he financials @ry J';;;; l!^:-l-"*;r'"i"il'H gooo!'caisandelectronics'illdoworse'facragr*= tn"-"*in-goy 2'6o/o na2'6Yo'Td [r#* rsve beenworsenedby shifts n capitarrows'

TheuniiedNations onferenceor'* -. o*Jffi'"^iiur,riTnol

"vr'*";i.ilii; roritino*"ranr21%.in008o$1'4r-r TrEy'brrd_ffiJi"ii;" ot rnuuriil"ni'irtrnotiong"n"i;i savs

FDIwillcontractvalffi 12-15% 2009'rnn4ce'trelGmemberAssociat ionofSoutheast4:i". lNations(ASEAN)has|aunchedaru irr cftdrer;;;;; closer ,"

'i"""r*t"g ; unified:.t"."rii broc' 'Greaterregionalffi b'Tryff J:,J!',ffr,1?.,;:q#i-::*$$:'t-:'H""H':[lilfi5":"s'""tu 5,-**" A.EAN nt"gr"f;nlii,tto nrins oii'tiuo" barriersta timewhen,iila'ileff bbcs'gE ecurcrnh *"iitnr*t"n, to .pui'; ;;; ofgiobal rotectionism'Th crisb has revearedertainweaknessesn the singapore

conomy' ingapore'sighr#t o"*r**lr"'in"-unit"o. st"i", and Europe.- lJ

''tr sma*shareof the exportsc#irs ro *rnafd;;;il markel .;,il;"i uurn"i*r" tii"u;"lrportr

rro* singaporeorrs wr dornestic;;;pr,r" lurt'a7^i"r""r,t ot sing""po'e;r

omestic.xportso china*:rdrrs oil. and ;; i z. o1r3,.2i " i"'"n"0"*1 91"i"0"*u"ti"

exports' ingapore'sow

#ffi fr;lyHl'*lif"'"lx?]i%hilx::l"j*ffif fr"'+f%"i::'"s?ffil*ffi a*,o-r*iJ",:"jil1:iltf;Jt"i:IS:3fi{fi;"?tr*;n::Xff'E?H"f"A'T'ffi:i$ hrt 6h+o(,e rcbcdi's fr;'sinsapore-to'',inl]'[iii[;,'"s,;"] "o*;;ili; tuin "t raiwanandsouthr(d." t.. bck oi ro""rerectronics";;ilffi io-an"nor't'n!-inJurtin singapore ayhaveJE"ri"d the elocationrend'sources:Asiarimes,lTDec"ottl!"r1,37,!#?j;]i.t"i"'r%%tOTable2: U!(3!q Singapore:s919-cted SinqaPore2009 2007 2008 ?999-1.3nn Rzvv -0.73 8.2 1.80.6 6.6 0.6neal COP(Vlnflatirn rate rale o/o

2.2 2.12.3 2.2 3.27.8 2.35,4 50.7 47.1-24.2-1.1-72.9 43.2 28.9 20.2 19.0J"llTEfll' dur.vur rr tv- ICurrentacrounffi -2.6 -1.6 9.6 -1.8-7.1-0.3 -5.C 1.6 -5.71.41 -5.22.1 -0.8 -3.2 1.450.55 0.64 1.5135.8 10.991.5 45.1166.4 clatt stics.gov.uxSource:www's'r'[5t


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8Figure 2: UK's and Singapore o/ ochange in House Prices

UK Annual Vo Cha,nge n House Frices

15_0%ls,03ts-*.$6s"ss-$"s?;

-10.s%"'t5.ffio,?&:ff&F&v:96 Jgt friby- @' "lari ,ll .yoeos08ff ios

Source: HalifaxSinqapore Annual% Change n HousePrices35----

Source:UrbanRedevelopment uthority,Singapore

and its

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Table3: GrossDomesticProduct GDP)components in UK and Sin of tota 2008UK 'AGDP US$b) 990 1561.2 113.1By expenditure(o/o f ctal)Consumption 64 41Government xpenditure 22 11Investment 17 31Exports 29 234lmports 32 215Source:UnitedNations tatistics ivision


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(b)

9Questions(a) (i) Compare the change in house prices for UK and Singapore in 2008 iFigure .

(ii) usingdata romTable2, explainhe changen house rice orUK n 2008.with the help of AD/ASdiagram, xplainhow changes n pricesof oil anhousehadaffected K'sequilibriumutput ndprice evel n 200g.Comment n the useof interestate o promote ighereconomic rowth n UKUsing data, discusswhether he global inancial risiswill have a greatimpact n he UK or Singapore conomy.As a consultant conomist, ssess he options hat you wouldpresent o thsingaporegovernment s possibleresponses o the challen$esposed bslowdownn world radeand oreigndirect nvestment.

Endof Paper

(c)(d)

(e)


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Suqqestedanswers for PJC Prelim H2 Economics p' l e2(a) (i) compare the change n houseprices or UK and Singapore n 200g n t2 l

Figure2.Houseprices n both UK and singapore rose initiallyat a decreasingratebefore allingat an increasingate n 2008. 1)(l f studentsays houseprice ose nitially efore alling 1 mark)Houseprices n UK started o fall earlier before irst halfof 2008)whileit fell ater n Singaporesecondhatfof 2008) 1)Overall,P of house n UK ell n 2008while t rose or Singapore.1)

data from Table2, explain he change n houseprice or UK in lz jA fall in real GDP (as shownby the negative% change n real GDp),coupledwitha rise n unemploymentat e 1) , ed o a fall n householdincome, s a result, fall n demand or houseswhich s a normal ooo,thus eadingto fa l t in [email protected] ;With the help of AD/ASdiagram,explain how changes n pricesof oi l I4 jand househad affected K' sequilibrium utput nd price evel n 2008.

(ii) Using2008.

(b)

GPL

fP 'rP

1 mark oraccuratelvabelleddiagramhatshowscorrectshiftof AD/AS

Realo/pY.' {- YHigherpriceof oil will ead o higher ost of productions oil is animportantawmaterialfor roduction.hus,ASshifts eftwards.1]Fall in priceof house eadto a fall in wealthand henceAD shiftleftwards.1]The all n AS s greaterhan all n AD resultingn he all nequilibriumoutput shown y he negativeealGDPgrowth) nd ise nequilibriumprice risingnflationate)nUK n2008.1]lf students nly ocuson ADor AS correctly ithaccurate iagramma>


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(d)

(c) Comment on the use of interest rate to promote higher economic t4Igrowth n UK.UK's centralbank lowered he interest ate so as to reduce he cost ofborrowing, thus helping to increase planned consumption andinvestmentexpenditure.This will bring about higher real nationalincome via the multiplier effect, thus promoting higher economicgrowth. 2)However, he policymay be limitedbecauseof(i) interest nelasticity f C and l. Recession n UK due to the financialcrisiswill causehouseholds nd firms o be pessimistic nd hence heymay not want o borrow o spenddespite he low nterest ate.(ii) policy conflict.UK is currently acing high inflationand negativegrowth.Lower nterest atewhilestimulating conomicgrowthwill leadto higherAD, GPL husworsening he problemof inflationn UK.2 marks for explaining how fall in interest rate works to promotegrowth and2 marks forl limitation with the use of data.(only 1 mark for limitation without use ot data)Usingdata, discusswhether he global inancial risiswill have a t8Igreatermpact n he UKor Singaporeconomy,Explainhow the olobal financialcrisis affect UK and SinoaporeeconomvFromExtract , theglobalinancial risishas ed o a fall n world radeand nvestment.hus,exports y UK and Singapore ndFDI nflow oUK andSingaporeould all.ExternaleffectExternally,he currentand capitalaccount f UK and Singapore illlikely o worsen.FromTable2, both UK and Singapore's DI havefallen significantly y 51"/o and 70% respectively.n addition,Singapore'surrent ccount urplus as allen harply y almost 8%to $50.7bn 2008.On theotherhand,UK'scurrent ccount eficit asactuallyeduced. hiscouldpossibly ue o a depreciationf the UK'scurrencyn 2008makingtsexports heaper ndhence ssumingriceelastic emand, alueof UK exportsmay ncrease. urthermore,ithafall n UK'snationalncome,mports an ncome-inducedxpenditurewill likely to fall as well hence improvinghe current account.Singapore'scurrent account may have worseneddue to anappreciationf the exchangeateof Singapore ollarvis-d-visUS$.Thus, n termsof the external ffect,Singapores morebadlyaffectedby the global inancial risisdue o its opennesso foreignradeandinvestment.lnternaleffectA fall n the external emandfall n netexports ndFDI) ed o a lall nthe levelof planned ggregate xpenditureAE)and hencevia themultiplier ffect, eal nationalncomeof UK andSingapore ouldbeexpectedo fall f it operates elowullemployment.fall n realoutputwill ead o a lall n thedemandor resources ence eadingo a rise n


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unemploymentate.As the levelof aggregate emand alls,demand-pull nflation ould ikely all.Furthermore,he financial risisalsoaffectedhe housing nd inancialmarkets. he fall n the housing nd stockprices ed o a fall n wealthof households hichwouldcausedomestic onsumptiono fall, hu scausing fall n he realoutputand employment f UK andSingapore.Compare with DataSingaporeexperienceda sharper al l in our economicgrowthas herrealGD P ell by a largerextentot 1.3Y" n 2009comparedo onlya fallof 0.73/" for UK. This is once againdu e to greateropenness f theSingaporeeconomywherebycurrentaccount akesup almost20/" other GDP for both 2008 and 2009 whereasUK's currentaccountonlytakes up 1 to 3/" of GDP. Unemploymentf bothcountries ad risenalthoughUK experienced greater ncreasen unemploymentate hanSingapore.This could be due to more effectivegovernmentpolicies(such as Job Credit Scheme and wage policies) arriedout by theSingaporegovernment o reduce unemployment . s both UK andSingapore governments ncreased heir governmentspending tostimulate he economies,heir budgetbalancehas worsened. n thecaseof UK, he budgetdeficit as n creased ontinuouslyor the past3yearsand hi swould ead o a risingnational eb tburden or UKwhichwouldaffect ts long term groMh. Singapore's as a healthier iscalposition s t has been unning budget urplusor he pastan dhencewill be in a better position o finance ts deficitwithout ncreasinghedebtburden.On the otherhand, he global inancial risis ouldalsobe beneficial sit led to a reductionn the inflation ate of both countries.Witha fall inglobal ncome, emand or commoditiesuchas oil and raw materialsfell causinga fall in priceof these commodities.his helped o lowercost push inflationparticularlyor Singaporewhich relied heavilyonimported ommoditiesor production.ConclusionSingaporeappeared o be more badly affectedby the global inancialcrisis due to its greateropennessof its economy.However,healthierbudgetpositionput her in a betterposition o adoptexpansionaryiscalpolicy or a longerperiodof time to counter he negativeeffectsof therecession. hus, herunemployments lessbadlyaffected hanUK.

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[10I(e)

Level Qescriptors MarksL3 For an answer that shows clearcomparisonof the full range of internaland external effects and supportedbysoundeconomicanalvsisanddata.

6 - 8 marks

L2 For an answer that compares a limitedrange of internal and external effectsand supported by appropriateeconomicanalysisand someuseof data.Only compare either nternalor externaleffectFor an answer that merely comparestheoretically ut makesno useof data.

4 - 5 marks

Max 4 marks

Max4 marksL1 For an answer with poor and inaccurateeconomic analysis, weak or nocomparison done between UK andSingaporeand makes little or no use ofdata.

1- 3 marks

As a consultant conomist,assess he options hat you wouldpresentto the Singaporegovernmentas possible esponses o the challenqesposedby slowdown n world radeand oreigndirect nvestment.ldentifvhe challenoesSRBeinga small and open economy hat is highlydependent n worldtrade and foreign direct investment for groMh, the process of"deglobalisation" hich led to a slowdown n world trade and foreigndirect investmentwould pose problem to the short term economicgrowthor singapore.As X and FDI fell, AD fell and via the multipliereffect, NY fell by a largerextent.Thiswouldbringabouta rise in unNas AD fellbelowFN.LRIn he LR, all n FDI willcauseAS to falland thusLT economic rowthwill declineas well. The continuous al l in FDI and world trale willincrease the threat of rising global protectionismwhich will affectSingapore's Tgrowth urther.Weaknesses f the Sinqapore conomvFrom the extract,the challenges aced by singapore in sustainingeconomicgrowthare causedby her highexportdependence n Unitedstates and Europe ather han china, her smalldomesticconsumptiondue to high evelsof homeownershipand relocation f her electronicsfirms to china due to the lack of large domesticelectronics irms toanchor he industryn Singapore. hus, appropriateresponses to thechallenges posed by the slowdown in world trade and investmentshould include not only sr policies to deal with the problems offalling growth and employment in the sR but also the LT policiesto deal with the fundamental weaknesses of the Singaporeeconomy which may affect our LT economic growth.


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Recommendationsoroolicy ptionsShort-termmeasuresSingapore an use expansionaryiscalpolicy o increasets G andC soas to overcomehe all n external emanddue o fall n X and FDl.TheexpansionaryFP should also be used to target at preventing isingunemployment aused by the globalslowdown, .g. the Job CreditScheme. explain briefly how the schemeworks) Thiswill preventCfrom falling as workers are able to retain their jobs and face lesseruncertainty.In addition,depreciationof the exchange rate of the S$ should beadopted o boosther exportcompetitiveness. hiswill lead o a rise nQx and a fall in Qm. AssumingMarshall-Lerneronditions satisfied,net exportswill rise eading o higherAD and actualeconomicgrowth.EvaluationSmallsize of k may limit he effectiveness f the expansionary p andER as a demand-managementool o increaseNY .Beinga small,openeconomywhere externaldemand makes up a large % of our AD,expansionary P ca n at most minimise he fall in AD and Ny. Ourrecoverys stil lcloselyie d o the recovery f the external conomy.A depreciation f S$ is l imited s a weak ER will ncreasehe priceofour impofis and may lead to higher nflation.Although he fear ofimportednflations less mminent ue to a weak globaldemand, t isstill mpossibleo weaken he ER of s$ by a largeextent ivenhe rhighdependence n mports.Given he limitations f the ST measures, olicyoptions hould ocuson long-termsupply measures o ensure that Sing apore s lesssusceptibleo futureexternal nstability.Lono-termmeasures1. Speed up ASEAN ntegration by reducing rade barriersbetweenASEAN members, his will promotegreater rade among ASEANmembersncluding ingapore,hus educinghe reliance f ASEANand Singaporeon US and Europe. n addition,a more integratedASEANwill pool heir resources nd offer a moreattractive ocationfor foreigndirect nvestment.For example,Singapore an offer herefficient ervicesector e.g. inancialand transportationectors) orthe foreign investment o coordinate ts primaryand secondaryproductionn Indonesia nd Malaysia nd sell ts inished oods.

EvaluationGreatercompetitionposed to the domestic ndustriesdue to theeconomic ntegration hichmay bring about risingunemploymentmay deter ASEAN rom integrating. ingaporewill ultimately ti l lbenefit as its tertiary sectors complements well with theprimary/secondaryroduction f the otherASEANmembersbut thismay not be true for the other ASEAN members as they mightcompetewitheachotheron primaryand secondary roduction.2. Use supply-sidepolicies to promote the competitiveness f theelectronics ector.FromTable2, Singaporehas beenexperiencing

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fall n productivity. hiscould ead o higheraverage ostand hus afall in competitiveness f its electronicsexports. n addition, t willcauseelectronicsirms o relocate o china where he cost s lowerand the returns o investment re higher.ss-side policiescan alsobe used o subsidiseR&D effortsby the smalldomesticelectronicsfirms in singaporeso as to promotehigherdemandand growthofour domeslicelectronicsirms, henceslowingdown the r-elocationof moreelectronicsirms.EvaluationThis is a long term measureand is subject o willingness f theygrler! to adapt to changing technorogyand skiils.'rn addition,R&Deffortscany highriskand success iie is uncertain.3- Diversify he economyby creatingnew sectorof groMh such astourism, healthcareand education and reduce d;ependence nelectronicsand financialwhich were badly affectedby the globalslowdownaccording o Extract5 and 6. The new sectorswill caterdirectly o china's rising onsumption s wellso thatwe willreduceou rdependence n US and Europe.Evaluationsingapore will stiil be dependent on the externarsector as aslowdown n the global economywill still affect the demand fortourism,healthcare nd educatign y foreigners. hile promotingtheseothersectors, ingapore houldstil lcontinueo promote urfinancialsectorsand electronics ectorswhichare our win-pillarofgroMh. singapore should focus on ensuring ha t ou r financialsectors emain ound hrough egulation f their ending ractice othat they will not be affectedby global financialcrisis-.'Asor herelectronicssectors, t is necessary o move up the value-addedchainso that singaporecan avoiddirectcompetiiionwithchina andmaintainher comparative dvantagen the electronics ector.

4- Promote higher domestic consumption.This can be done byreducing he level.ofhome.ownershiphroughencouragingentalof housing nstead.Alternatively,he government an ensure hatthe price of housing remain affordlble through reguration oprevent speculationsuch as tax on capital gain so that homeownersdo not have to reduce their savings ubstantially o buyhouses hus reducing he amountof their consumption. tcordingto Figure2, houseprices n Singapore re highry oratire hichmay affect he wearthand destabilisehe economy.Thus, it maybe necessary or the government o minimise he volatilityof th6housingprices o ensurea morestableconsumption nd giowthofthe economy.EvaluationThereare manybenefitsof high rate of homeownership omparedto rentalhousingsuch as lowerrate of crimeand greaier ncentiveby homeowners o maintaina cleanerenvironmentl romFigure2,housingpricesare subject o greatvolatilitydue to speculati6n ndthe. nfluxof foreignersand.foreigncapital o singapore. t may bedifficult o control he speculative ctivityand anyr=nappropriatenddrasticmeasuresmaycause he "assetbubble o bursi',wirichcoutdspark of f a recessiondue to the negativewealth effect. (caseofJapan)

1 ' l


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OverallevaluationThe global economic crisis has revealed some fundamentalweaknesses n the Singaporeeconomy. Being small and open,Singapores extremely ulnerableo the slowdownn world rade andinvestment.While it is necessary or Singapore o promote higherdomestic onsumption,here s a limit o ho w much t can increasedomestic consumptiongiven its small populationand small domesticmarket.Hence,a betterpolicywould be to continueo promote ts tradeand investmentby making herself relevant o the rest of the worldthroughASEANeconomic ntegration nd supply-side olicies o moveup the value-addedchain and promote he growthof her small anddomesticenterprisesSMEs).Only hen will it be able o overcome hechallenges osedby the fall n world radeand nvestment.

Level Descriptors Marks3 At least two well explained and analysedeconomicmeasures o deal with the short termand long term challenges posed by theslowdown n trade and investment.Ansurer rbsupported bv data.

6-8

2 Two sufficiently well explainedand analysedeconomicmeasures o deal with the challenges.However,answer may only focus on the shortterm challenges (e.9. use fiscal policy tostimulategrowth of the economy) and not thelong term challenges. Answer may also not besufficiently upported y data.1 well explained and analvsed ST/LTmeasuresupported v data

4-5

Max 4

1 Weak and inaccurate explanationof 1 or 2economicmeasures o deal with the challenges.No or littleuse of data o supportanswer.1-3

E2 A well developed evaluation to select bestmeasure whichcould be a combination f short-term and long-termmeasures o deal with thechallenoes)2

E1 An undeveloped valuation 1

l2

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PJC Case Study Trade Qn.pdf