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

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,

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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

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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.

f: forecast data

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

& Asia Monitor, Aug 2010

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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]

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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, [2]
Germany, Japan and China over the period 1986 to 2010.

1m for general trend (differences)

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 refinement (to what extent)

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.

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.’

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, 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.

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, 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

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

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 [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
OPEC (Oil), South Africa (Coal) the manufacturing sector of
developed economies as China has
Commodities rich countries, South high comparative and competitive
Africa (Gold),Australia (Uranium) advantage in the production of low-
Also, rising investment from China value, labour-intensive products such
in South Africa  Rise in national as textile, basic electrical goods.
incomes & standards of living However, developed countries can
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.
consumers  Rise in export
revenue of luxury manufacturers in Rise in imported unit COP
the developed world. 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.

Looking within (Internal Looking within (Internal Economic

Economic Players) Players)
 Rising household incomes due  Environmental degradation

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to huge FDI inflows.  Higher  Rising income inequality

SOL  Rural-Urban income disparity
 More jobs available

Level Description Mark

2 A balanced view with reasoned judgement 4-7
demonstrated.
1 Some attempt to assess the gainers and losers of 1-3
China’s strong growth and continued integration
into the global economy.
Level Evaluation Marks
E2 Well-justified evaluation 3
E1 Some attempt to evaluate but may not be 1–2
supported by sound economic reasoning

cii As a consultant economist, assess the options that you would [8]
recommend to the governments of the affected countries.

For the potential gainers:

 Pro-trade policies
 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

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 Description Mark

2 Evaluative assessment of appropriate policy 5-8
options implemented by governments of the
affected countries.
1 Little attempt to relate to question. Largely 1-4
listing of policy options.

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