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CATHOLIC JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATION In preparation for General Certificate of Education Advanced Level Higher 2

ECONOMICS 9732/01 Paper 1 3 September 2010 1400-1615 Additional Materials : Writing Papers 2 hours 15 minutes

READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write the question number on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use highlighters, glue or correction fluid. Begin each question on a new sheet of paper. Answer ALL questions. At the end of the examination, fasten and hand in every question separately. The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 7 printed pages.

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Answer ALL questions. Question 1

Car population and pollution Extract 1: Road pricing makes good economic sense. But voters hate it Britain’s sclerotic roads learned that the recent global financial catastrophe had slightly improved their lives: traffic volume has fallen by about 3% since the start of the recession. But the Confederation of British Industry (CBI), warned drivers that it would not last: traffic has risen remorselessly and a return to growth seems inevitable as the economy recovers. Congestion does more than irritate drivers. It makes employees and deliveries late, it snarls up modern “just-in-time” supply chains and it clogs up labour markets by making commuting difficult. The cost of all this is almost impossible to measure. But a big review of transport put the cost between £7 billion and £8 billion a year. To fix the problem, the CBI offers a couple of ideas. First, it wants to see more flexible working, with employees staying at home or staggering their hours, spreading the traffic load over more hours in the day. Second, it wants to see more money spent on building new roads and widening existing ones. Third, it wants to encourage better use of existing roads. All these will help, but at best they merely chip at the edges of the problem. The CBI’s big idea is to match supply with demand using a system of nationwide road tolling. To economists the case for road charging is simple. The problem is not a lack of capacity, but a failure to allocate it properly. A system of charges would be fairer than the current means of paying for roads from a mixture of fuel duties and general tax revenue. For the politicians, though, road charging is lethal. The public’s first suspicion is that pricing would be just another tax, an interpretation that would seem plausible with today’s eye-watering budget deficits.

Source: The Economist, 15 March 2010

Source: Land Transport Authority, Singapore

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Extract 2: Panic over likely quota cut sends COE prices north Premium for commercial vehicles hits 10-year high. Making a dash before a foreseeable and sizeable cut in quota size next month, bidders sent certificate of entitlement (COE) premiums higher across the board again yesterday. Motor traders said the anticipation of a reduction in COE supply from next month was the main cause of yesterday's price spikes. The number of bids submitted rose by only 6.5 per cent to 4,753, a sign that sales in hand had not risen by much since two weeks ago. Motor traders said the premium increase in COE for cars up to 1,600cc remained modest because bidders in this segment typically have thinner margins. Rising demand from businesses on the back of an improving economy drove the commercial vehicle premium to its highest level in a decade.

Source: The Straits Times, 11 March 2010 Extract 3: COE, ERP and the question in between It is not often that Singaporeans hear of differences in opinion within the highest ranks of Government, but there was a hint last week. Senior Minister Goh Chok Tong was at a dialogue with Marine Parade residents when he revealed an interesting divide over transport policy. He said Minister Mentor Lee Kuan Yew was in favour of making car ownership very expensive so that fewer people would own cars hence, leading to less congestion on the roads. Prime Minister Lee Hsien Loong, on the other hand, wanted more people to be able to own cars and to control congestion by applying more stringent usage measures like Electronic Road Pricing (ERP). ‘The PM believes it’s fairer if you can spread car ownership. Philosophically, the PM is right. In a practical sense, the MM is right,’ he said. ‘But then the problem is, the middle class can’t own cars, only the rich can. So the PM is right philosophically, and I think it’s the fairer approach. But then, more road congestion, and so ERP.’ It has always been a tricky balance, getting the right mix of ownership and usage measures to work, to ensure not just free-flowing traffic but also meet the growing aspiration of people to have their own set of wheels. Which is the more effective method for Singapore? Which is the fairer? Is it possible to be both effective and fair? This is not just a matter of transport policy. It is also highly political nature, especially when questions of fairness are raised. Or to put it bluntly, as SM Goh did, should only the rich be able to own cars? You cannot get more political than that.

Source: The Straits Times, 5 September 2008

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Extract 4: Centre mulls over pollution permits In what could be the first step towards a market-based system of pollution permits, the government plans to roll out a Rs.500-crore online pollution monitoring system across 6,000 industrial sites across the country. The Central Pollution Control Board (CPCB) has been asked to prepare a national action plan for online pollution monitoring based on the model being implemented in Tamil Nadu, according to Union Minister of State for Environment and Forests Jairam Ramesh. The Tamil Nadu Pollution Control Board launched its Care Air Centre last month to assess real time emissions from factories in the Manali industrial area. Censors have been put in place in the smokestacks, as well as to measure the ambient air around nine plants at Manali, to measure the levels of sulphur dioxide and nitrogen dioxide. The data is transmitted every ten seconds to the Care Air Centre. Mr. Ramesh said that while the system would cover 202 sites in Tamil Nadu by the end of the year, it will be expanded across the country to cover the entire organised industrial sector. It is still being debated who will pay the Rs. 500 crore cost of setting up the system. However, this system could then be used to power a system of pollution permits, the Minister said. “An inspection-based system is simply not sustainable,” said Mr. Ramesh. “If we think we're going to create more and more laws, and put in more and more inspectors on the field and expect companies to comply, it's just not going to happen. In my view, a market-based system is the only solution in the long run.” Michael Greenstone, an Economics professor at the Massachusetts Institute of Technology, suggested that giving companies permits for allowable amounts of pollution and allowing them to trade it would result in much larger reductions at much lower costs. “Since some industries face much higher costs of reducing pollution, they can buy pollution permits in the market from other industries that have a lower cost,” he said.

Source: The Hindu, New Delhi, 24 July 2010 Questions (a) (i) Using Figure 1, compare the trend of COE prices for Category A and Category B

between June 2009 and April 2010.

[2]

(ii) With the help of a diagram, explain the impact of the imposition of COE on the price of cars.

[4]

(b) With reference to Extract 1, using economic analysis, comment on how traffic congestion affects the allocation of resources within Singapore.

[6]

(c) With reference to the data where appropriate, assess the effectiveness of the different policies implemented to solve the problem of traffic congestion and the possibility of government failure in implementing these policies.

[10]

(d) With reference to Extract 4, discuss whether Singapore should adopt Michael Greenstone’s suggestion to address pollution.

[8]

[Total 30m]

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Question 2

China’s Trade Surpluses and its Exchange Rate

Extract 5: Obama urged to confront China over yuan valuation A wide coalition of US trade unions and members of Congress is stepping up pressure on President Barack Obama to confront China over alleged illegal currency manipulation that could have cost millions of American jobs. The push comes ahead of a visit by the US treasury secretary, Tim Geithner, to Beijing next month to discuss trade issues. Against a background of rising job losses in the US, union leaders and members of Congress are backing a bill that threatens Beijing with punitive duties on its goods unless it changes its currency practices. The low value of China's currency, the yuan, has been a point of friction between the US and China for more than a decade. Some economists, including Geithner, accuse China of deliberately keeping the value of the yuan low to make its export goods cheaper, undercutting US manufacturing and leading to US job losses. The Chinese yuan was estimated to be undervalued by about 40%, which gave Chinese a huge export advantage, undercutting US products and jobs.

Source: The Guardian, 20 May 2009

Extract 6: The export juggernaut: good for China, but good for its neighbours too When China joined the World Trade Organisation (WTO) in 2001, many developing neighbours felt more than a twinge of discomfort. With China already an export juggernaut, they feared that the dismantling of tariff and other barriers that went with WTO membership would make the country irresistible to manufacturers, diverting foreign direct investment (FDI) that might otherwise have gone to them. This appears not to have happened. Certainly, foreign investment in China has increased, as have China's already heady exports, which since 2003 have been growing at their fastest pace since the early 1990s. In 2004 China overtook Japan to become the world's third-largest exporter, behind America and Germany. But foreign investment has grown elsewhere too. The ten ASEAN countries saw a record $37 billion of investment in 2005. For some manufacturers, South-East Asia (or India) serves as a hedge against something going wrong in their China operations – be it social unrest, economic problems or a business climate that turns against foreign investment. But much investment outside China is in fact contingent on the China boom. So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia – Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half's slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China's appetite for raw materials for a long time to come.

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For South Korea, Taiwan, Hong Kong and Singapore, trade has also turned from the rich world towards China. For Hong Kong, Taiwan and this year probably even Japan, China is the biggest trading partner. In China, the processing and assembly of imported parts and components now accounts for more than half of all exports. China's growing trade surplus, it argues, is explained entirely by this kind of assembly. China has recently recorded phenomenal growth in exports of high-tech products too, principally notebook and desktop computers, DVD players, mobile phones and the like. Between 1998 and 2004 American imports of Chinese laptops jumped from $5m to $7.7 billion and display units from $860,000 to $4.9 billion. Some now ask whether China is vaulting up the technology ladder or even threatening American national security. China's exports have to be put in context. Though very open to trade, China's economy, like America's, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports. The World Bank forecasts that this will be the first year in which China's imports will be growing by more than America's, becoming the biggest source of import growth in the world. Goldman Sachs, an investment bank, reckons that China's imports for domestic use are now roughly the same as those used in assembling exports, whereas five years ago they were only half as big. Much of what is imported is in the form of raw materials – oil, copper, gas, timber – to feed the China boom.

Source: The Economist, 29 Mar 2007 Figure 2: China’s Exports, % of Total

Table 1: Singapore-China Bilateral Trade (S$ Thousands)

2008 2009 Imports from China 47,594,565 37,585,345 Exports to China 43,817,922 38,125,119 Total Trade 91,412,487 75,710,463

Source: IE Singapore

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Figure 3:

Table 2: Exchange Rate of Singapore Dollar (SGD) vs Chinese Yuan (CNY)

Year 2005 2006 2007 2008 2009 SGD/100CNY 20.63 19.64 19.73 21.09 20.55

Source: Monetary Authority of Singapore Questions (a) (i) Using Figure 3, describe the trend of US trade balance with China.

[2]

(ii) Using a demand and supply diagram, explain how China “manipulates” its exchange rate.

[4]

(iii) Assess the effects of a change in the value of Chinese yuan on US trade balance with China.

[8]

(b) Explain two possible effects of FDIs have on China’s balance of payments.

[4]

(c) Using Table 2, identify the trend of exchange rate between Singapore dollar and Chinese yuan between 2005 and 2009.

[2]

(d) Assess whether China’s growth is a threat or benefit to the Singapore economy.

[10]

[Total 30m]

[END OF PAPER]

Figure 1

Figure 2

US trade balance with China ($bn per month)

The fixed exchange rate ended in July 2005

China US $ exchange rate, Yuan per $1

Source: Reuters EcoWin

Chinese Yuan / US Dollar exchange rate and balance of trade in goods