Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 Question 2 Extract 4: The Asian Growth Story 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, JC2 Economics IJC@Champions Way 2010

but for re-export to the Western world.e. On 22 Dec. 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. the winner of the 2008 Nobel economics prize. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action. it will probably be decades before Chinese consumers are able to match their American counterparts. wrote recently in the New York Times that by holding down its currency to support exports. America’s International Trade Commission approved new tariffs on imports of Chinese steel pipes. With US consumption comprising 70% of a US$14 trillion GDP (US$9.Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 namely that a key factor behind increased intra-Asian trade was final demand from the US and EU. not components) has been shrinking as a percentage of GDP to less than 40%. But there are several other reasons why China’s exports held up better than those of its competitors during the global recession. and the elimination of textile quotas in January 2009 allowed China to increase its slice of that market.8 trillion). In other words. In fact. not necessarily for the Chinese market. Adapted from Asia Monitor. Chinese private consumption (i. A third point is that although incomes are rising in China. Foreign hostility to China’s export dominance is growing.0 trillion GDP (US$1. China “drains much-needed demand away from a depressed world economy”. Adapted from The Economist. European Union governments voted to extend anti-dumping duties on shoes imported from China for another 15 months. much of intra-Asian trade is intermediate goods that are assembled as final products in China. 7 Jan 2010 JC2 Economics IJC@Champions Way 2010 . Paul Krugman. On 30 Dec. which it ruled were being unfairly subsidised. and Chinese consumption at 40% of a US$4. Lower incomes encouraged consumers to trade down to cheaper goods.6 trillion). there is no contest which ultimately exerts greater global weight. for final products. Foreigners insist that the main reason for China’s growing market share is that the government in Beijing has kept its currency weak.

10 Aug 2010 & Asia Monitor. Aug 2010 JC2 Economics IJC@Champions Way 2010 .5 per cent on a year-on-year basis. supported by an increase in public sector construction activities. Growth was led by the biomedical manufacturing and electronics clusters. Singapore expanded by 18.0 to 15.9 per cent growth in the first quarter. Manufacturing output expanded by 44.5 per cent. stronger than the 16. f: forecast data Adapted from Singapore: Ministry of Trade & Industry.9 per cent in the first half of 2010.Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 Extract 7: Best Performer in 2010. Average in 2011 The Ministry of Trade and Industry (MTI) announced today that the Singapore economy expanded by 17.0 per cent. In the second quarter of 2010. The construction sector grew by 11.8 per cent on a year-on-year basis. MTI will maintain the GDP growth forecast for 2010 at 13. which increased production of higher value active pharmaceutical ingredients and semiconductor chips.

explain why Singapore is forecasted to be the top performing economy in Asia in 2010 but an average growing economy in 2011.’ How far do you concur with his view? [5] (ii) (b) With reference to extract 7 and your own relevant knowledge. Japan and China over the period 1986 to 2010. [5] (c) (i) Assess who are the gainers and losers of China’s impressive growth performance and continued integration into the global economy. assess the options that you would recommend to the governments of the affected countries.Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 Questions (a) (i) Compare the change in the share of world exports among United States. [10] As a consultant economist. Germany. [8] (ii) JC2 Economics IJC@Champions Way 2010 . [2] ‘Paul Krugman commented that China “drains much-needed demand away from a depressed world economy” by holding down its currency to support exports.

Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 JC2 Economics IJC@Champions Way 2010 .

there was a reversal in trend observed in Germany in 1999. [2] aii ‘Paul Krugman commented that China “drains much-needed demand [5] away from a depressed world economy” by holding down its currency to support exports. In contrast. leading to a ↓ in AD and draining the much needed demand away from these economies. Thus. Germany and Japan is negative. the change in share of world exports in China is increasing at an exponential rate. Japan and China over the period 1986 to 2010. the share of world exports of other economies declined sharply. 1m for refinement (to what extent) However. 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 JC2 Economics IJC@Champions Way 2010 . Anti-Thesis Argument: US Sub-Prime Mortgage Crisis  World-Wide Recession  Sharp fall in world incomes  A rising significant proportion of households switched to cheaper made-in-China import-substitutes  Thus.’ How far do you concur with his view? Thesis Argument: Undervalued Yuan  ↓Px in terms of foreign currency → More than proportionate rise in quantity demanded of Chinese exports (Price elastic dd) → ↑ exports revenue However. Over the same time period.Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 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. as Chinese exports gain price competitiveness. 1m for general trend (differences) From 1986 to 2010. the decline in share of world exports in both United States and Japan has become more severe. Germany. the change in share of world exports of United States.

increased production of higher value active pharmaceutical ingredients and semiconductor chip in both biomedical manufacturing and electronics clusters respectively. developed countries can incomes & standards of living turn this threat into an opportunity by Increasingly more luxury goods are restructuring their industries and being demanded by Chinese move into higher-value industries. explain why Singapore is forecasted to be the top performing economy in Asia in 2010 but an average growing economy in 2011.Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 b With reference to extract 7 and your own relevant knowledge.5%)  Evidence: In particular. basic electrical goods. However.Australia (Uranium) Also. Part 1: Explain why Singapore is forecasted to be the Top performing economy  Strong recovery of manufacturing sector (Evidence: manufacturing output expanded by 44. South Africa (Coal) developed economies as China has Commodities rich countries.  Low statistical base in 2009 Part 2: Explain why Singapore is forecasted to be an average growing economy in 2011  Highly trade dependent . Looking within (Internal Looking within (Internal Economic Economic Players) Players)  Rising household incomes due  Environmental degradation JC2 Economics IJC@Champions Way 2010 .Global growth is likely to remain weak  High base effects in 2010 [5] c Assess who are the gainers and losers of China’s impressive growth [10] performance and continued integration into the global economy. Gainers Losers Global Economic Players Global Economic Players Energy exporting countries eg Rising structural unemployment in the manufacturing sector of OPEC (Oil). consumers  Rise in export revenue of luxury manufacturers in Rise in imported unit COP Rise in price of skills-intensive the developed world. rising investment from China value. labour-intensive products such in South Africa  Rise in national as textile. 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. South high comparative and competitive advantage in the production of lowAfrica (Gold).

Little attempt to relate to question. with reasoned judgement Mark 4-7 1-3 Some attempt to assess the gainers and losers of China’s strong growth and continued integration into the global economy. Evaluation Well-justified evaluation Some attempt to evaluate but may not be supported by sound economic reasoning Level E2 E1 Marks 3 1–2 cii As a consultant economist. Largely listing of policy options. Mark 5-8 1 1-4 JC2 Economics IJC@Champions Way 2010 . [8] For the potential gainers:  Pro-trade policies  Expand on exports (commodities.Suggested Answers for 2010 Prelim Exam II/ H2 Economics/ P1 Q1 to huge FDI inflows. pro-business environment.  Higher  SOL  More jobs available Rising income inequality Rural-Urban income disparity  Level Description 2 1 A balanced view demonstrated. intra-industry trade)  Policies to attract FDI from/in China eg political stability. assess the options that you would recommend to the governments of the affected countries. attractive corporate tax climate  Need to evaluate proposed policies & relate to specific circumstances faced by the country concerned For the potential losers:  Produce products which they have the comparative advantage in ⇒ Wage reforms and industrial restructuring ⇒ Need to implement supply side policies eg raising labour productivity  Pollution laws etc Level 2 Description Evaluative assessment of appropriate policy options implemented by governments of the affected countries.

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