2010 Prelim 2 H2 H1 Case Study Q2 Suggested Answer

31 Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1

JC2 Economics IJC@Champions Way 2010

Question 2 The Asian Growth Story

Extract 4: China's Global Impact China's impressive growth performance and continued integration into the global economy over the past 25 years has been exceptional. China's strong growth over the past few years has already had a considerable impact. In 2003, for example, Japan's exports to China rose by 68%. In addition, China has now overtaken the US as the main trading partner of South Korea and Taiwan. China has had a similar impact on world commodity markets. It is now the biggest consumer of many commodities in the world, including steel, copper, coal and cement, and is the world's second-largest oil consumer after the US. China's rise will lead to more jobs being lost in the manufacturing sector, and other low-skill sectors of developed economies. However, as these jobs are lost, new ones will be created as the money that China earns from its exports is spent on imports from rich economies. This will allow the developed world to specialise more in higher-value industries, leading to greater specialisation in the global economy. The other main channel where China will affect the global economy is through changing relative prices. China is already pushing down the price of most low-value, labour-intensive products, such as clothing and some basic electrical goods. Consumers in developed countries, who are net importers of these products, will be the chief beneficiaries. On the other hand, there is expected to be a rise in the price of skill-intensive goods that China needs to import; and of raw materials, such as oil, grain and other agricultural products. There will, however, be some countries that lose out as a result of China's growing global economic influence. These are most likely to include countries whose exports compete with those of China, but supply it with few intermediary products. These countries will also suffer from higher prices of raw materials. This analysis is supported by recent economic forecasts from the IMF, which show that by 2020 the only region that will lose out from China's rise will be South Asia, including countries such as Bangladesh, whose textile export industries will suffer in the face of cheaper and more efficient Chinese competition.

Adapted from Asia Monitor, Jan 2005

Extract 5: Decoupling from US and European Economy? During the global boom years of 2003-07, there was much talk of Asia (and emerging markets in general) 'decoupling' from the US and Europe, thanks to strong growth in China and to a lesser extent India. China was very much seen as an alternative anchor to the US, and statistics showing a rising proportion of individual Asian countries' exports to China seemed to corroborate this view. However, the decoupling argument had several flaws. Firstly, in an increasingly globalised world, it does not make sense for Asia (or emerging markets) to decouple from its main trading partners. So, Asia could not decouple from the US by coupling to China, because China was itself coupled to the US. This leads to a second point,



namely that a key factor behind increased intra-Asian trade was final demand from the US and EU. In other words, much of intra-Asian trade is intermediate goods that are assembled as final products in China, not necessarily for the Chinese market, but for re-export to the Western world. A third point is that although incomes are rising in China, Chinese private consumption (i.e. for final products, not components) has been shrinking as a percentage of GDP to less than 40%. With US consumption comprising 70% of a US$14 trillion GDP (US$9.8 trillion), and Chinese consumption at 40% of a US$4.0 trillion GDP (US$1.6 trillion), there is no contest which ultimately exerts greater global weight. In fact, it will probably be decades before Chinese consumers are able to match their American counterparts.

Adapted from Asia Monitor, Feb 2009 Extract 6: China’s share of world markets increased during the recession.

Trade frictions with the rest of the world are hotting up. On 30 Dec, America’s International Trade Commission approved new tariffs on imports of Chinese steel pipes, which it ruled were being unfairly subsidised. On 22 Dec, European Union governments voted to extend anti-dumping duties on shoes imported from China for another 15 months. Foreigners insist that the main reason for China’s growing market share is that the government in Beijing has kept its currency weak. But there are several other reasons why China’s exports held up better than those of its competitors during

the global recession. Lower incomes encouraged consumers to trade down to cheaper goods, and the elimination of textile quotas in January 2009 allowed China to increase its slice of that market. Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

Adapted from The Economist, 7 Jan 2010



Extract 7: Best Performer in 2010, Average in 2011 The Ministry of Trade and Industry (MTI) announced today that the Singapore economy expanded by 17.9 per cent in the first half of 2010. MTI will maintain the GDP growth forecast for 2010 at 13.0 to 15.0 per cent. In the second quarter of 2010, Singapore expanded by 18.8 per cent on a year-on-year basis, stronger than the 16.9 per cent growth in the first quarter. Manufacturing output expanded by 44.5 per cent on a year-on-year basis. Growth was led by the biomedical manufacturing and electronics clusters, which increased production of higher value active pharmaceutical ingredients and semiconductor chips. The construction sector grew by 11.5 per cent, supported by an increase in public sector construction activities.

Adapted from Singapore: Ministry of Trade & Industry, 10 Aug 2010

& Asia Monitor, Aug 2010

f: forecast data



Questions (a) (i) Compare the change in the share of world exports among United States,

Germany, Japan and China over the period 1986 to 2010. [2] (ii) ‘Paul Krugman commented that China “drains much-needed demand away

from a depressed world economy” by holding down its currency to support exports.’ How far do you concur with his view? [5]

(b) With reference to extract 7 and your own relevant knowledge, explain why Singapore is forecasted to be the top performing economy in Asia in 2010 but an average growing economy in 2011. [5]

(c) (i) Assess who are the gainers and losers of China’s impressive growth performance and continued integration into the global economy. [10]

(ii) As a consultant economist, assess the options that you would recommend

to the governments of the affected countries. [8]



2010 Prelim 2 H2/H1 Economics Case Study Answer Question 2 The Asian Growth Story ai Compare the change in the share of world exports among United States,

Germany, Japan and China over the period 1986 to 2010.

[2]

From 1986 to 2010, the change in share of world exports in China is increasing at an exponential rate. In contrast, the change in share of world exports of United States, Germany and Japan is negative.

1m for general trend (differences)

However, there was a reversal in trend observed in Germany in 1999. Over the same time period, the decline in share of world exports in both United States and Japan has become more severe.

1m for refinement (to what extent)

aii ‘Paul Krugman commented that China “drains much-needed demand away from a depressed world economy” by holding down its currency to support exports.’ How far do you concur with his view?

[5]

Undervalued Yuan Thesis Argument:

↓Px in terms of foreign currency → More than proportionate rise in quantity demanded of Chinese exports (Price elastic dd) → ↑ exports revenue However, as Chinese exports gain price competitiveness, the share of world exports of other economies declined sharply. Thus, leading to a ↓ in AD and draining the much needed demand away from these economies.

US Sub-Prime Mortgage Crisis Anti-Thesis Argument:

World-Wide Recession Sharp fall in world incomes A rising significant proportion of households switched to cheaper made-in-China import-substitutes Thus, further drains the demand away from their economies → ↓ in AD Comparative Advantage that China has Elimination of textile quotas in Jan 2009 – enables China to increase

its slice of this market



b With reference to extract 7 and your own relevant knowledge, explain why Singapore is forecasted to be the top performing economy in Asia in 2010 but an average growing economy in 2011.

[5]

Part 1: Explain why Singapore is forecasted to be the Top performing economy Strong recovery of manufacturing sector (Evidence: manufacturing

output expanded by 44.5%) Evidence: In particular, increased production of higher value active

pharmaceutical ingredients and semiconductor chip in both biomedical manufacturing and electronics clusters respectively.

Low statistical base in 2009 Part 2: Explain why Singapore is forecasted to be an average growing economy in 2011 Highly trade dependent - Global growth is likely to remain weak High base effects in 2010

c Assess who are the gainers and losers of China’s impressive growth performance and continued integration into the global economy.

[10]

Gainers Losers

Energy exporting countries eg OPEC (Oil), South Africa (Coal)

Global Economic Players

Commodities rich countries, South Africa (Gold),Australia (Uranium) Also, rising investment from China in South Africa Rise in national incomes & standards of living Increasingly more luxury goods are being demanded by Chinese consumers Rise in export revenue of luxury manufacturers in the developed world.

Rising structural unemployment in the manufacturing sector of developed economies as China has high comparative and competitive advantage in the production of low-value, labour-intensive products such as textile, basic electrical goods.

Global Economic Players

However, developed countries can turn this threat into an opportunity by restructuring their industries and move into higher-value industries. Rise in imported unit COP Rise in price of skills-intensive goods that China needs to import eg capital goods Large proportion of the increase in commodities prices due to heightened in demand for raw materials such as oil from China.

Rising household incomes due

Looking within (Internal Economic Players)

Environmental degradation

Looking within (Internal Economic Players)



to huge FDI inflows. Higher SOL

More jobs available

Rising income inequality Rural-Urban income disparity

Level Description Mark

2 A balanced view with reasoned judgement demonstrated.

4-7

1 Some attempt to assess the gainers and losers of China’s strong growth and continued integration into the global economy.

1-3

Level Evaluation Marks E2 Well-justified evaluation 3 E1 Some attempt to evaluate but may not be

supported by sound economic reasoning 1 – 2

cii As a consultant economist, assess the options that you would recommend to the governments of the affected countries.

[8]

Pro-trade policies For the potential gainers:

Expand on exports (commodities, intra-industry trade) Policies to attract FDI from/in China eg political stability, pro-business

environment, attractive corporate tax climate Need to evaluate proposed policies & relate to specific circumstances

faced by the country concerned

Produce products which they have the comparative advantage in ⇒ Wage reforms and industrial restructuring ⇒ Need to implement supply side policies eg raising labour productivity

For the potential losers:

Pollution laws etc

Level Description Mark 2 Evaluative assessment of appropriate policy

options implemented by governments of the affected countries.

5-8

1 Little attempt to relate to question. Largely listing of policy options.

1-4

2010 Prelim 2 H2 H1 Case Study Q2 Suggested Answer

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