2010 PJC Prelim Exam H2 Paper 2 Question 1 Starbucks experiences a decline in customer visits in -merica.

2he current economic environment is the weakest in the company3s history, marked by lower home values and risin! costs for ener!y, food and other products that are directly impactin! Starbucks4 customers. Starbucks has also been dealin! with fierce coffee competition from McDonald3s and Dunkin3 Donuts. -dapted from 2he 5uardian, )1 -pril )''6 (a) (b) (a) Analysis of Question 0xplain what mi!ht cause Starbucks to experience a decline in customer visits in -merica. 7&'8
Command ord: Explain: to make clear 9se dd:ss analysis Causal links must be clearly stated and elaborated. !ey "on"epts# Falling DD Falling SS

0xplain what mi!ht cause Starbucks to experience a decline in customer visits in -merica. 7&'8 -ssess the relevance of price elasticity of demand, income elasticity of demand and cross elasticity of demand to the Chief 0xecutive of Starbucks who aims to increase sales revenue.

7&.8

Question requirements: Candidates are expected to use the information in the preamble and provide a detailed causal explanation of how demand and supply factors affect the customer visits in Starbucks. Level L3 Descriptors Detailed analysis of factors that contribute to the decline in customer visits in Starbucks caf . Candidate is able to demonstrate a simultaneous chan!e in demand and supply. 3 factors "combination of demand and supply# and !ood examples for $ % &' marks *or candidates who use economic analysis "demand and supply framework# to explain the decline in customer visits in Starbucks caf . +owever, insufficient developed in some areas. -ble to correctly identify and elaborate on at least one demand factor and one supply factor. Max . marks for ) well developed demand or supply factors L& Smatterin! of points with little economic explanation. 0xplanation shows little understandin! of factors that contribute to the decline in customer visits in Starbucks caf . &(1 Marks $(&'

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Starbucks: faces a decline in customer visits in -merica

Lower home values due to economic slowdown

Competition from McDonald3s A Dunkin3 Donuts -vailability of close substitutes "C0D @ '# 2he !reater the value of C0D, the !reater the fall in dd for Starbucks coffee Lower DD

<isin! costs for ener!y and food +i!her costs of production

;ealth effect

;eak consumer confidence

$edu"e in %%

Consumers cut back spendin! on luxuries such as branded coffee Lower DD

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(b)

-ssess the relevance of price elasticity of demand, income elasticity of demand and cross elasticity of demand to the Chief 0xecutive of Starbucks who aims to increase sales revenue.

7&.8

Analysis of Question
Assess t&e rele'an"e of pri"e elasti"ity of demand( in"ome elasti"ity of demand and "ross elasti"ity of demand to t&e C&ief Exe"uti'e of %tarbu")s &o aims to in"rease sales re'enue* Command ord: Assess Cnvolves makin! a Bud!ment Fey economic terms: Sales revenue G > H= Pri"e elasti"ity of demand +n"ome elasti"ity of demand Cross elasti"ity of demand Context: Starbucks coffee % premium coffee <aise sales revenue

Question requirements: Candidates are expected to make a Bud!ement in terms of the usefulness of the various concepts of elasticity of demand in helpin! Starbucks to raise its sales revenue.

Level 3 Level ) Level &

Clear and well developed answer that explains how 3 elasticity concepts and strate!ies can increase Starbucks4 sales revenue. Cllustrations !iven are based on the !iven context. 2here is evidence of detailed economic analysis. *ocus on ) elasticity concepts and elaborated on strate!ies that can increase Starbucks4 sales revenue. 9ndeveloped analysis in some areas. Erief mention of how the Chief 0xecutive of Starbucks can use the different concepts of elasticity of demand to increase sales revenue.

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0xplained Bud!ment based on analysis Mainly unexplained Bud!ment based on analysis

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I Demand for Starbucks coffee is price elastic ">0D @ &# %Starbucks3 premium(priced coffee a luxury !ood %-vailability of substitutes "as reflected in the preamble# IChief 0xecutive can explore the option of reducin! prices raise 2< %0.!. a &'M increase in price Juantity demanded falls by more than proportionately rise in 2< ISince >rofit G 2< % 2C. Cf the Chief 0xecutive of Starbucks mana!es to raise 2< successfully, profit will rise "assume cost rises by a smaller extent compared to the rise in 2<#

Cncome elasticity of demand

I0conomic downturn consumers would reduce expenditure on non(essential items like premium coffee. Spendin! on necessities become a priority as fuel and food prices increase. Chief 0xecutive of Starbucks will be concerned about fallin! demand. Cn order to increase sale revenue, he will have to consider how to raise the demand for Starbucks coffee durin! an economic downturn. IStrate!ies to raise the demand for Starbucks coffee durin! an economic downturn %Cntroduce a more economical version of lattes, mochas and frappuccinos for consumers who have become more price(conscious %2he economical versions are likely to have lower -C than the existin! drinks can sell these at a much lower prices than the drinks in the current menu. %2o keep customers comin! to remainin! outlets, promote cheap Kcombination mealsL of a drink and food. 0valuation: 2he extent of the rise in customer visits depends on "i# Juality of the new drinks "the economical versions# and "ii# publicity of the new drinks and combination meals

Cross elasticity of demand

I2he de!ree of substitutability between Starbucks coffee and those that are sold by its competitors such as McDonald3s and Dunkin3 Donuts would determine how sales of Starbucks coffee would be affected if competitors decide to reduce prices. I;ith reference to the preamble, Starbucks has also been dealin! with fierce coffee competition from McDonald3s and Dunkin3 Donuts. 2his implies that competitors4 coffee prices are likely to be much lower than Starbucks prices and Juality is comparable to Starbucks coffee Starbucks lost part of its market share in the coffee retail market IStrate!ies to reduce the extent of the fall in customer visits %;ireless network to attract customers %Delivery service with no additional char!e if within )km radius

0valuation: (May not !ain if price war exists (-s reflected in the preamble, costs have risen "e.!. fuel and food costs#. Cn view of risin! costs of fuel and food, costs of production have risen. +ence, there is a need to consider strate!ies to reduce costs before cuttin! prices of Starbucks coffee. 9nless, the Chief 0xecutive only aims to raise sales revenue and is not concerned about the level of profit.

0valuation: (2he rise in costs due to the installation of wireless network should be less than the !ain in revenue IDevelopin! new coffee blends could be a lon!(term option to compete with the fast(food chain

Limitations of the use of demand elasticities Ielasticities data are based on past data, taste of consumers can chan!e Itoo lar!e a percenta!e chan!e mi!ht mean an inaccurate estimate Ibased on the assumptions of ceteris paribus, which is rarely true for lon! Ihence, estimates useful for small percenta!e chan!es and relatively short time periods only

PJC 2010 Prelim Exam Question 2 1*Question analysis Assess the view that oligopoly is the best market structure to achieve efficiency, equity and innovation. [25] Command ord KassessL reJuires students to compare and explain with Bustification and evaluative 2* Question comments the issue in Juestion $equirements Students are to compare and contrast the various market structures with re!ard to their ability to achieve efficiency, eJuity and innovation and provide a value Bud!ement supported with examples. Fey word KbestL reJuires students to compare between the various market structures and provide value Bud!ements 2hese key words are microeconomic aims of all !overnments and students are reJuired to clarify the meanin! of these three aims to demonstrate understandin!

,* %"&emati" Plan of ans er Assess the view that oligopoly is the best market structure to achieve efficiency, equity and innovation. [25]
+ntrodu"tion# Define underlined key terms and set assessment criteria
-r!ue that oli!opolies have the followin! flaws and hence it is not the best structure to promote efficiency, eJuity and innovation &. Market imperfection results in allocative inefficiency ). 2he substantial market power which firms have means they are able to set prices above mar!inal cost, resultin! in an uneJual distribution of income whereby consumer surplus is transferred to producer surplus. 2his worsens eJuity.

?n the other hand, oli!opolies have the followin! merits 1. -bility to !ain 0?S leads to !reater productive efficiency

omparison with monopolistic competitive market structures 0fficiency 2he relatively smaller siNed MC firms means that the extent of the ability to set >@MC is lower as compared to oli!opolistic firms lower de!ree of allocative efficiency 0Juity Due to low E20 and a si!nificantly lower de!ree of price settin! ability, MC firms earn normal profits in L< unlike oli!opolistic firms who, due to their si!nificantly hi!her de!ree of price settin! ability, are able to earn supernormal profits in the L< "more eJuitable# ?n the other hand, monopolistic firms also have their flaws as compared to oli!opolistic firms. Cnnovation "!ive example of 2elco# MC firms lack incentive to innovate due to normal profits earned in L< "link to characteristic of low E20#

omparison with ! market structures 0fficiency >C firms are allocative and productive efficiency due to the fact that they are price takers. "eJuilibrium price and o:p entirely determined by market forces# 0Juity >C firms promote eJuity as they earn normal profit in L< "due to no E20# Cnnovation -s >C firms earn normal profit in L<, they lack ability to en!a!e in <AD. 0ven in S<, due to presence of perfect knowled!e within the market, <AD is also avoided as other rival firms can easily free ride on the successful <AD effort of others.

Con"lusion# 2here is no one best mkt structure criteria to Bud!e suitability of mkt structures include whether the industry has a need to reap 0?S A encoura!e innovation and whether the industry values the need for choice A variety "to maximiNe consumer welfare#

-ar)in. %"&eme
L3 % Demonstrates ex"ellent knowled!e re!ardin! the characteristics and behaviour of oli!opolistic market structures and able to explain how oli!opoly may:may not be able to attain efficiency, eJuity and innovation and explanation is well developed. Students must also "ompare bet een at least t o ot&er mar)et stru"tures with relevant examples. "preferably >C and MC# L3 % Demonstrates sound knowled!e re!ardin! the characteristics and behaviour of oli!opolistic market structures and able to explain how oli!opoly may:may not be able to attain efficiency, eJuity and innovation but explanation is underdeveloped in some areas. Students must also "ompare bet een at least t o ot&er mar)et stru"tures with relevant examples. "preferably >C and MC# L3 % Demonstrates sound knowled!e re!ardin! the characteristics and behaviour of oli!opolistic market structures and able to explain how oli!opoly may:may not be able to attain efficiency, eJuity and innovation and explanation is ell/de'eloped. Students must have compared with at least one other market structure -ward a maximum of &/ marks for such answers. L) % Demonstrates adeJuate knowled!e re!ardin! the characteristics and behaviour of oli!opolistic market structures and able to explain how oli!opoly may:may not be able to attain efficiency, eJuity and innovation but explanation is underdeveloped in some areas. Students must also compare between at least one other market structures with relevant examples. "either >C or MC# L) % Demonstrates some knowled!e re!ardin! the characteristics and behaviour of oli!opolistic market structures and able to explain how oli!opoly may:may not be able to attain efficiency, eJuity and innovation but explanation is underdeveloped in some areas. Students must also compare between at least one other market structures with relevant examples. "either >C or MC# L& % Demonstrates little knowled!e re!ardin! the characteristics and behaviour of oli!opolistic market structures and able to briefly explain how oli!opoly may:may not be able to attain efficiency, eJuity and innovation but explanation is limited and mostly underdeveloped L& % Smatterin! of points 0) % -ble to explain these conflicts and provide a value Bud!ement re!ardin! the issue in Juestion 0&% -ble to provide evaluative comments re!ardin! the conflicts between the microeconomic aims

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2010 PJC Prelim Exam H2 Paper 2 Question , , (a) (b) 0xplain whether public housin! could be considered to be an example of a public !ood or merit !ood. 7&'8

Discuss whether !overnment intervention can lead to a more efficient allocation of 7&.8 resources where merit !oods exist in markets.

(1) Analysis of Question (to be done in 1/2 mins) (a) 0xplain whether public housin! could be considered to be an example of a publi" .ood or merit .ood. 7&'8 Command ord Explain / reJuires you to clarify and interpret the statement with examples to illustrate understandin!. !ey ords: Whether % Oes or Po "Must address and answer this aspect# Public Housing % +DE : +ousin! owned by 5ovt : <ented : Sold A public good or merit good " >ublic !oods are !oods or svcs that has the features of non(rivalry and non(excludability and as a result would not be provided by the free market. Merit !oods are !oods the !ovt feels ppl will underconsume and therefore ou!ht to be subsidiNed:free.

Question requirement 2his Juestion reJuires you to clearly explain with examples whether public housin! fulfills the criteria of >ublic !oods or Merit !oods. 2he ideal way to do this would be to examine each characteristic of each type of !ood and considerin! whether >ublic housin! fulfills them. (2) %"&emati" Plan (to be done in 2/, mins)

+ntro Define >ublic +ousin! Define >ublic 5ood Define Merit 5ood State Stand: >ublic housin! is a merit !ood and not a public !ood D

0ody 0xplain "define# non(rivalry, !ive example of non(rivalry "street lamp, when & person consumes the li!ht from the street lamp, it does not diminish the amount of li!ht available for others to enBoy# A compare with public housin!, explain with example "with 1' flats, when & is consumed, it decreases the Jty of flats available to others by &# 0xplain "define# non(excludable, !ive example of non(excludable "fireworks, not possible to prevent non(payers from enBoyin! the viewin! of fireworks from various locations in the area# A compare with public housin!, explain with example "it4s possible to prevent non(payers from enBoyin! the flat throu!h lock and key where those who don4t pay cannot access the flat without the key. 0xplain "define# under consumed, where consumption is below the socially optimum level. 0xplain usin! the MSE:MSC(M>E:M>C economic framework in the case of positive externalities "should be consumed : desirable# *ull analysis of framework and explanation of dia!ram is expected to score the full mark in this Juestion. Students expected to &# explain private eJuilibrium )# explain diver!ence between MSE and M>E 3# explain social optimum 1# contrast social optimum with private eJuilibrium to show that =s @ =e thus provin! that there is an underconsumption. Con"lusion <eiterate stand and summariNe main ideas and link to part b re!ardin! the need for !overnment intervention to deal with the market failure in the case of merit !oods bein! underconsumed. Level Descriptor 3 Detailed discussion explainin! clearly why public housin! is not a public !ood and how it is a merit !ood. <elevant examples and accurate dia!rams used to support explanation. ) Some attempt at explainin! why public housin! does not exhibit the characteristics of non(excludability and non(rivalry. Some attempt to reco!niNe the Qmerit4 nature of housin! QRve externality4 as deemed by the !ovt and how the free market eJuilibrium results in market failure. & sided "only touched on merit or only touched on public !ood# & Some knowled!e of Qmerit4 !ood and characteristics of Qpublic4 !ood but lackin! application in answer. Smatterin! of points. Marks $(&' .(/

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b# Discuss whether !overnment intervention can lead to a more efficient allocation of resources where merit !oods exist in markets. 7&.8 (1) Analysis of Question (to be done in 1/2 mins) b# Discuss whether !overnment intervention can lead to a more efficient allocation of resources where merit !oods exist in markets. 7&.8 Command ord Discuss 1 0xamine, analyse carefully and present considerations both for and a!ainst the issue raised in the Juestion. !ey ords: Whether % Oes or Po "Must address and answer this aspect# Govt ntervention % >olicies, <e!ulations !ore e""icient allocation % <educe D;L, move consumption closer to socially optimum "need not 0LCMCP-20 Mkt failure# Where merit goods exist % -ny merit !oods, >ublic +ousin!, +ealthcare, 0ducation etcS &'

Question requirement 2his Juestion reJuires you to clearly explain with policy examples the ways the !ovt can intervene to improve the allocation of resources in the market for various merit !oods and consider any possible case"s# where !overnment intervention may lead to !overnment failure where inefficiency is worsened. (2) %"&emati" Plan (to be done in 2/, mins)

2his part of the Juestion !ave students the freedom to address a ran!e of merit !oods and a ran!e of policies, with some "non exhaustive# options shown in the schematic plan. *or any policy, it is important for students to &# explain the policy "what it is about# support with examples )# explain the economic effects of the policy "how does it work, does it affect dd : ss : etc# 3# show how the policy solves the market failure "increases consumption of the !ood# 1# consider why such a policy is effective "positive evaluation# .# consider limitations of the policy or how there can be !overnment failure 2o score the hi!hest evaluation marks, students were expected to propose solutions to limitations and address the need to use a ran!e of policies to solve the various root issues that resulted in market failure in different types of merit !oods. Level Descriptor 3 Detailed discussion considerin! !ovt intervention in at least ) types of merit !oods and ) different policy measures leadin! to an improvement in the allocation of resources and at least & way in which !overnment failure may occur. 5ood use of examples and dia!rams ) Some attempt at explainin! policies to improve the allocation of resources in merit !oods. &(sided ar!ument without a consideration of possible !overnment failure. Some attempt at usin! examples and dia!rams. Descriptive with some !aps in analysis. Marks D(&&

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9nderdeveloped analysis showin! a lack of understandin! of the issue. Smatterin! of points. *or an evaluative assessment of policy4s effectiveness, limitations and solutions to potential problems resultin! from !overnment intervention. *or an unexplained assessment, or one that is not supported by analysis

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2010 PJC Prelim Exam H2 Paper 2 Question 2 2 (a) (b) Explain %in.apore3s "&oi"e of ex"&an.e rate rat&er t&an interest rates as an instrument for its monetary poli"y* 6is"uss &et&er "&an.es in domesti" or forei.n fa"tors are more li)ely to influen"e t&e ex"&an.e rate of t&e %in.apore e"onomy* 4105 4175

(1) -ar)er3s $eport (2) Analysis of Question

(a)

Explain %in.apore3s "&oi"e of ex"&an.e rate rat&er t&an interest rates as an instrument for its monetary poli"y*

4105

Command ord: Explain reJuires you to select and apply economic concepts, principles and theories to explain and analyse policy decisions

!ey ords: Exchange rate v interest rates as instrument "or its monetar# polic# % why Sin!apore "M-S# influence exchan!e rate rather than interest rate to mana!e the economy.

Question requirement 2his Juestion reJuires you to clearly explain why chan!es in exchan!e rate have stron!er effects on the macroeconomic aims of Sin!apore than chan!es in interest rates.

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(,) %"&emati" Plan 0xchan!e rate "0<# and Cnterest rates "C<# Define 0xplain how 0< and C< works 0xplain why 0< has a stron!er effect on Sin!apore4s macreconomic aims !iven her small and open economy Small economy with small domestic market G@ open to forei!n market for H G@ appreciation will lower the cost of producin! H with hi!h M content G@ lower >x G@ hi!her =x more than prop G@ Ualue H rise G@ current a:c improves leadin! to hi!her actual !rowth and P

Small economy which lacks resources +i!h dependence on M for raw materials and basic foodstuff G@ appreciation of ST leads to lower cost push inflation

0xplain limitations of interest rate policy Difficulty in controllin! MS and C< due to capital mobility Link back to =n (2) 8rite out t&e full essay (to be done by follo in. "losely to t&e outline in ,7 mins) 9&in)in. Pro"ess Cntroduction: Define key concepts 0xplain how 0< and C< works Essay ("ontent( analysis and e'aluation) 0xchan!e rate measures the price of a domestic currency in terms of another forei!n currency, e.!. & ST G './ 9ST while interest rate is the price of money or the cost of borrowin! in percenta!e term. +ow 0< works Chan!es in 0< aim to chan!e the price of exports and imports to influence external demand to achieve the macroeconomic obBectives. *or example, an appreciation of 0< increases the price of exports in forei!n currency and decreases the price of imports in domestic currency. 2his will lead to a fall in Juantity of exports and a rise in Juantity of imports. -ssumin! Marshall(Lerner condition is satisfied whereby the sum of price elasticity of demand for exports and imports is !reater than one, the value of net exports will fall which is useful for lowerin! demand(pull inflation. Conversely, a depreciation of 0< leads to a rise in net exports and help to increase economic !rowth and employment. +ow C< works &1 C< has weak effect on -D and 5D> as it only affects domestic dd rather than external dd

9&in)in. Pro"ess

Essay ("ontent( analysis and e'aluation) ?n the other hand, chan!es in C< aim to chan!e domestic demand of consumption and investment expenditure to achieve the macroeconomic aim. - rise in interest rate will increase the cost of borrowin! so as to reduce the profitability of investment, thus lowerin! the level of investment. -t the same time, households will increase their savin!s and cut back on their consumption on credit. +ence, as the level of a!!re!ate demand falls due to a fall in consumption and investment demand, !eneral price level falls leadin! to a fall in demand(pull inflation. Conversely, a fall in interest rate leads to a rise in consumption and investment demand and help to increase economic !rowth and employment. 2he small siNe of Sin!apore4s economy implies that we lack natural resources such as crude oil, iron and steel and hence have to import most of our natural resources. Cn addition, she has limited land and does not have comparative advanta!e in producin! foodstuff, thus she has to import most of the foodstuff. +ence, value of Sin!apore4s imports make up almost )''M of her 5D>. 2his means that by appreciatin! her exchan!e rate, Sin!apore is able to keep the price of her imports low so that she can reduce her rate of inflation due to hi!h price of imports. Ey keepin! the prices of these imported raw materials low, this will enable our firms to keep the cost of production low, hence lowerin! cost push inflation in Sin!apore. 2he lower price of foodstuff ensures that a lower cost of livin! for her residents and hence they will not demand for hi!h wa!es thus helpin! once a!ain to minimise cost push inflation. Eein! small also implies that she has a small domestic market and hence has to rely heavily on forei!n market to export her !oods. +ence, the value of her exports makes up almost )1'M of her 5D>, indicatin! her hi!h de!ree of openness to forei!n trade. +er manufacturin! exports have very hi!h import content and thus by appreciatin! the exchan!e rate of the Sin!apore dollar, this will help to keep the cost of producin! these manufacturin! exports low and thus maintainin! her export competitiveness. ;ith a price elastic demand, a low price of exports will lead to a more than proportionate increase in the Juantity demanded for exports, thus increasin! the export revenue earned. 2his will subseJuently help to achieve a healthy current account balance and a hi!her actual economic !rowth and employment.

0xplain why 0< has a stron!er impact on Sin!apore4s macroeconomic aims due to our small and open economy

0xplain limitations of C< policy

C< policy is limited in Sin!apore due to the difficulty of controllin! domestic money supply and C< in Sin!apore. -s an international financial centre, S4pore is very open to capital flow. +ence, when domestic C< rises above forei!n C<, this will lead to a rise in capital inflow. -s a result, domestic money supply rises "in a mana!ed 0< system# causin! the C< falls back to its ori!inal level. Cn addition, the presence of many forei!n financial institutions further increases the difficulty of controllin! money supply and interest rates in Sin!apore. *urthermore, C< influences domestic demand which makes up a smaller percenta!e of 5D> than external demand. 2hus, chan!e in interest rate has smaller impact on her 5D> than exchan!e rate which influences external demand. &.

9&in)in. Pro"ess Conclusion

Essay ("ontent( analysis and e'aluation) 2hus, the small and open economy leads to Sin!apore4s choice of exchan!e rate rather than interest rates as an instrument for its monetary policy. -ar)s $(&' .(/ &(1

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6es"riptor - ell/de'eloped ans er that Bustify the choice of usin! 0< rather than C< by Sin!apore by considerin! the characteristics of economy, impact and the ease of implementation. -n answer that suffi"iently explain how 0< impact on the economy without Bustifyin! why 0< is preferred over C<. -n answer that is poorly de'eloped and may be ina""urate.

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(2) Analysis of Question

(b)

6is"uss &et&er "&an.es in domesti" or forei.n fa"tors are more li)ely to influen"e t&e ex"&an.e rate of t&e %in.apore e"onomy* 4175

Command ords Discuss involves evaluatin! alternative explanation and perspective of economic issues.

!ey ords Domestic factors internal factors such as level of competitiveness, inflation:!rowth rate of Sin!apore and domestic !overnment policies 0xternal factors external factors such as forei!n interest rates, forei!n inflation rates:!rowth rates and expectations of speculators

Question $equirement 2he Juestion reJuires students to explain how domestic and forei!n factors affect the exchan!e rate of Sin!apore currency and to wei!h which has a stron!er effect.
(,) %"&emati" Plan

Cdentify type of 0< re!ime in Sin!apore Mana!ed 0< system *actors affectin! 0xchan!e <ate of ST Market forces of DD:SS *orei!n *actors *orei!n i:r *orei!n inflation rate and !rowth rate Chan!e in expectations of speculators Domesti c inflation rate and !rowth rate 5ovt:Central Eank intervention Domestic *actors Competitiveness of domestic !oods:H 5ovt influence

Compare domestic and forei!n factors Conclude 9&in)in. Pro"ess Cntroduction: Essay ("ontent( analysis and e'aluation) Sin!apore operates a mana!ed 0< system whereby her 0< of the ST is influenced by both market forces of demand and supply and also !overnment intervention. Eein! a small and open economy, forei!n factors such as forei!n inflation rate, !rowth rate, interest rate and expectation of forei!n speculators play an important role in determinin! her 0<. +owever, with a stron! forei!n currency reserves, M-S plays an eJually important in ensurin! a stron! and stable exchan!e rate of ST. 2hus, domestic factors such as !overnment policies which help to keep her inflation rate low and her exports competitive also play an important role in determinin! the exchan!e rate as well. &$

9&in)in. Pro"ess 0xplain how forei!n factors influence 0< of ST

Essay ("ontent( analysis and e'aluation) ?ne of the main forei!n factor affectin! the 0< of ST is the rate of forei!n inflation. -s mentioned in part "a#, Sin!apore relies heavily on forei!n imports for raw materials and foodstuff. 2he demand for such !oods is price inelastic due to lack of substitutes and the need for these !oods. +ence, when price of raw materials and foodstuff rose "as in )''$:6#, !iven the inelastic demand of imports, the Juantity demanded for these imports fall less than proportionately and hence her import expenditure will rise. 2hus, SS of our currency will rise and 0< of ST falls, ceteris paribus. 2he fall in 0< of ST may worsen our imported inflation further. +ence, to keep the price of forei!n imports from increasin! the domestic inflation rate of Sin!apore, M-S will use its forei!n currency reserves to buy back ST and sell forei!n currency, thus pushin! up the 0< of ST. 2hus, while forei!n factors play an important part to influence her 0<, domestic factor such as intervention of M-S is also important in influencin! her 0<. ?ther forei!n factors such as forei!n interest rate and forei!n economic !rowth rates are eJually important. <ecently, due to a fall in !lobal income, maBor economies such as 9S and 9F lowered their interest rate to stimulate their economies. 2he fall in forei!n interest rate led to more capital inflow into the Sin!apore economy and hence increased the demand for ST causin! it to appreciate. +owever, M-S intervened once a!ain to keep the 0< of ST low so as to stimulate the !rowth of our exports which mi!ht be fallin! due to a fall in forei!n income. ?nce a!ain, this shows that forei!n factors influence the 0< of ST but M-S will closely monitor the 0< to ensure that the 0< of ST does not chan!e and affect our economy ne!atively. 2hus, both domestic and forei!n factors influence the 0< of ST Lastly, expectation of forei!n speculators has a stron! effect on the 0< of ST. Cn &DD$, the 0< of ST depreciated by a lar!e extent due to the -sian *inancial Crisis which caused speculators to lose confidence of the -sian currencies. 2hus, the hu!e amount of capital outflow caused the supply of ST to rise leadin! to a sharp depreciation of the ST.

0xplain how domestic factor influence 0< of ST

Since Sin!apore cannot control our domestic i:r, she needs to influence investors4 confidence of our currency to maintain a stron! 0<. 2hus, a sound financial sector, stron! reserves and stable economy have helped to infuse !reater confidence in the ST which enabled the 0< of ST to remain stron! and stable over the years. 0ven durin! the -sian *inancial Crisis, while the ST depreciated to!ether with the other -sian currencies, the extent of depreciation of the ST is lesser than the other -sian currencies due to the !reater stability of Sin!apore4s financial sector. 2he stable 0< of ST to!ether with !overnment policies which led to a low inflation rate, productive workforce, efficient infrastructure and social and political stability help to attract many forei!n direct investment in Sin!apore and promote export competitiveness. ;ith a healthy current and capital account, the 0< of ST is kept stable and stron! over the years. 2hus, domestic factors play a stron! role in influencin! the 0< of ST as well.

Conclusion

Eoth domestic and forei!n factors are important in influencin! the 0< of the ST. Eein! a small and open economy, the 0< of ST is stron!ly affected by forei!n factors which is beyond the control of the Sin!apore !overnment. &6

9&in)in. Pro"ess

Essay ("ontent( analysis and e'aluation) 2his may often !ive rise to instability of the 0< of ST which will affect our trade and investment adversely. 2hus, it is necessary for the Sin!apore !overnment to ensure macroeconomic stability and maintain a stron! reserve of forei!n currency to achieve a stable and stron! 0< of ST, thus showin! that domestic factors are eJually, if not more, important in influencin! the 0< of ST for a small and open economy. -ar)s D(&& /(6

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6es"riptor -n answer that correctly identifies and explains the domestic and forei!n factors affectin! Sin!apore 0< and compare the effects of domestic and forei!n factors on the Sin!apore 0< -n answer that clearly explains the domestic and forei!n factors affectin! Sin!apore 0<. +owever, the students may have identified some of the domestic and forei!n factors wron!ly. Comparison of domestic and forei!n factors may also be weak. Max / for explanation of the factors affectin! 0< of ST with no attempt in classifyin! under domestic and forei!n factors. -n answer that !ives an inaccurate explanation of the various factors affectin! Sin!apore 0<. Domestic and forei!n factors may also be wron!ly identified and comparison is not done. ) well developed comparisons to show whether domestic or forei!n factors has a stron!er effect on Sin!apore 0<. & well developed comparison or ) weak comparisons

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2010 PJC Prelim Exam H2 Paper 2 Question 7 -ssess the view that raisin! labour productivity is the best way to achieve the macroeconomic aims of Sin!apore. Analysis of Question -ssess the view that raisin! labour productivity is the best way to achieve the macroeconomic aims of Sin!apore.
Command ord: Assess Cnvolves makin! a Bud!ment -bsolute word: KbestL Fey economic terms: Labour productivity

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Macroeconomic aims
Context: Sin!apore

Question requirements: Candidates are expected to consider if raisin! labour productivity is the best way to achieve the macroeconomic aims of Sin!apore. >art &: -nalyse how a rise in labour productivity affects the Sin!apore economy in terms of the key macroeconomic aims. >art ): Vustify that raisin! labour productivity may not necessary be the best way to achieve the macroeconomic aims of Sin!apore. >art 3: Cmplement complementary economic policies to achieve the macroeconomic aims of Sin!apore.

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-nswer shows excellent knowled!e of how the various macroeconomic aims can be achieved by increasin! labour productivity in Sin!apore. Candidate also Bustified the importance of other macroeconomic policies to complement risin! labour productivity and concluded that the latter is not necessary the best policy to achieve macroeconomic aims in Sin!apore. ;ell(developed of at least ) other macroeconomic policies and show how these policies complement risin! labour productivity to achieve macroeconomic aims. 5ood use of examples. -nswer shows !ood knowled!e of how the various macroeconomic aims can be achieved by increasin! labour productivity in Sin!apore. Candidate attempts to Bustify that raisin! labour productivity is not the best way to achieve the macroeconomic aims of Sin!apore and hi!hli!hts the importance of implementin! other macroeconomic policies "at least ) other policies# to complement risin! labour productivity. Some examples are hi!hli!hted. -nswer shows some knowled!e of how the various macroeconomic aims can be achieved by increasin! labour productivity in Sin!apore. Candidate did not thorou!hly consider if raisin! labour productivity is the best way to achieve the macroeconomic aims of Sin!apore. Eriefly explain the use of other policies. -nswer shows some knowled!e of how ) macroeconomic aims can be achieved by increasin! labour productivity in Sin!apore. 9nderdeveloped explanation in some areas. 0xplanation has some reference to the -D(-S model and the Sin!apore economy. Eriefly explain how a rise in labour productivity affects the economy. Several errors and inconsistencies occur in the explanation. Little or no reference to the Sin!apore economy. Smatterin! of a few valid points and briefly mentioned how a rise in labour productivity affects the Sin!apore economy.

E'aluation E2 (, 1 2) Vud!ment based on economic analysis Some attempt at synthesis E1 (1 1 2) Mainly unexplained Bud!ment Po attempt at synthesis

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9&esis statement# raisin! labour productivity enable Sin!apore to achieve the macroeconomic aims of Sin!apore

<aise potential !rowth <aisin! labour productivity <aise -S <educe inflation rate

<aise export competitiveness

5reater inflow of *DC

0xplain how labour productivity would lead to a shiftin! of the -S curve such that a hi!her full employment level of national income is attained. 9se the -S(-D framework to show that the inflation rate would be fallin! and PO would rise.

+i!her volume of exports Lon!(term E?> eJuilibrium

<educe unemployment

:imitations# (9&e su""ess of s)ills trainin. or up.radin. depends on t&e le'el of edu"ation( a.e and personal in"lination* %ome( parti"ularly t&e less edu"ated and t&e older( are not re"epti'e to t&e need for re/trainin.( or s)ills up.radin.* 9&erefore( before implementin. retrainin. initiati'es and pro.rams to en"oura.e potential .ro t&( t&e .o'ernment &as to ensure t&at t&ere is a positi'e attitude to ards t&e poli"y of "onstant up.radin. of s)ills and )no led.e* ?urt&ermore( employers may be relu"tant to foot t&e bills to send or)ers for retrainin. and s)ills or )no led.e up.radin. for fear of @ob &oppin. by or)ers &ose employability &a'e in"reased due to t&e a"quirin. of ne s)ills and )no led.e* ($aisin. labour produ"ti'ity is a lon./term measure* Aot an appropriate option if t&ere are immediate ma"roe"onomi" problems t&at needs to be addressed su"& as demand/pull inflation or risin. "y"li"al unemployment* +n %in.apore( a monetary poli"y "entered on ex"&an.e rate is used to redu"e t&e impa"t of "ost/pus& inflation arises from risin. "osts of imports* (9&e inflo of ?6+ is not mainly influen"e by t&e le'el of labour produ"ti'ity* Bt&er fa"tors su"& as .lobal e"onomi" outloo)( t&e quality of infrastru"ture are equally important*

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Anti/9&esis statement# raisin! labour productivity may not be the best method for Sin!a pore to achieve the macroeconomic aims as there is a need for the !overnment to implement other complementary policies

<aise -S 2o achieve sustainable non( inflationary economic !rowth

<aise -D

0stablish bilateral trade a!reements Sin!apore: exceptionally open to international trade H is the lar!est component of -D: H is more than ).1 times of 5D> 2o ensure sustainable economic !rowth, -D will have to be increased via a hi!her volume of H 2o underpin rapid trade !rowth, a series of bilateral free trade "*2-s# were concluded with several countries, for examples, -ustralia and 9S. *2-s are ne!otiated with the primary aim of enhancin! exports. Sin!apore(based firms will enBoy cost(savin!s from the elimination of customs duties and improved market access. Cost savin!s are derived not only from tariff savin!s, but also from customs cooperation measures and removal of onerous re!ulations. *urthermore, *2- Sin!apore to become a competitive investment destination, which in the lon! run, will help create more Bobs for Sin!aporeans. Bt&er poli"ies# 9o implement a prudent fis"al poli"y# Ci'en t&e relati'ely small siDe of our domesti" e"onomy (i*e* bot& .o'ernment and &ouse&old spendin.) as "ompared to t&e external e"onomy( t&e %in.apore .o'ernment t&us implements a prudent fis"al poli"y* 9&e fa"t t&at %in.apore is a relati'ely open e"onomy also implies t&at it is 'ulnerable to flu"tuations in t&e external e"onomy* As su"&( %in.apore3s e"onomy is "losely lin)ed to "&an.es in t&e orld3s e"onomy* As su"&( durin. times of orld re"ession( %in.apore3s e"onomy ould similarly be affe"ted by export slump and fall in forei.n dire"t in'estment* 9&us ould lead to a fall in A6 and a "orrespondin. more t&an proportionate fall in national in"ome 'ia t&e multiplier pro"ess* 9&us results in a slo do n in a"tual .ro t& and in"rease in "y"li"al unemployment in our e"onomy* +n su"& times of e"onomi" do nturn( %in.apore3s e"onomy t&us needs adequate funds to implement expansionary fis"al poli"ies in order to stimulate t&e e"onomy* An example ould be t&e $esilien"e Pa")a.e t&at as implemented in 200> to "ope it& t&e effe"ts of t&e "urrent finan"ial "risis* 9&us( maintainin. a prudent fis"al poli"y in times of &ealt&y e"onomi" .ro t& ould allo t&e .o'ernment to build up its .o'ernment adequate reser'es for implementations of appropriate expansionary poli"ies in times of .lobal do nturn*

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2010 PJC Prelim Exam H2 Paper 2 Question = China still keeps surplus of both the current account and the capital account in the first half of )''D. "a# 0xplain why some countries such as China are experiencin! current account surplus while other countries such as 9S- are experiencin! current account deficit. "b# -ssess whether surplus in both the current account and capital account are always beneficial for an economy.
(1) -ar)er3s $eport (2) Analysis of Question (to be done in 2/, mins)

China still keeps surplus of both the current account and the capital account in the first half of )''D. "a# 0xplain why some countries such as China are experiencin! current account surplus while other countries such as 9S- are experiencin! current account deficit. Command ord: Explain $h# reJuires the students to !ive economic reasons : analysis to support the statement that China is experiencin! current account surplus and 9S- current account deficit !ey ord: %urrent account surplus &de"icit' ( Peed to know where the surplus : deficit is comin! from the components of the current account "visible, invisible, investment income, unilateral transfer#

Question requirement 2his Juestion reJuires you to clearly explain the statement that China is experiencin! current account surplus and 9S- a current account deficit usin! lo!ical economic reasons : analysis. (,) %"&emati" Plan (to be done in ,/2 mins) Current account surplus : deficit Define Components of current account Uisible "!oods# and invisible "services, investment income, lateral transfers# Chan!es in Current -ccount ?vervalued : undervalued of exchan!e rate Chan!e in comparative advanta!e <elative inflation rate Chan!e in Pational Cncome ?thers

Surplus in China and Deficit in 9SConclusion

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(2) 8rite out t&e full essay (to be done by follo in. "losely to t&e outline in ,7 mins) 9&in)in. Pro"ess Essay ("ontent( analysis and e'aluation) Cntroduction: 2he current account records the imports and exports of currently produced !oods Define key concepts and services and unilateral transfers. Ct measures whether a country is livin! within its means. Ct also reflects the international competitiveness of the economy. 2here are ) components under the current account, visible trade account and invisible trade account. Uisible account measures the value of export and imports of !oods whereas invisible account measure the value of export and imports of services includin! investment income and unilateral transfers. Pormally, unilateral transfers are not si!nificant in the current account. Ct would be the same for investment income unless a country has hu!e investments overseas or a hu!e forei!n direct investments flowin! in. "2heory# :oss of Comparati'e Ad'anta.e % - country loses comparative advanta!e Causes of a with respect to other competitors due to improved efficiency of competitors or a chan!e in the decrease of internal efficiency. -s a result, exports are likely to fall leadin! to current account trade deficit "current account#. Due to hi!her labour cost in many developed "deficit or countries, they lost their comparative advanta!e in labour(intensive surplus# manufactured !oods "such as textile and toys# to the low(cost developin! countries. 2hus, these developed countries experienced a fall in export earnin!s and rise in import expenditure on these !oods resultin! in a current account deficit. An o'er/'alued ex"&an.e rate % ;ith an overvalued exchan!e rate, a country will tend to experience relatively low import price and a hi!h export prices. -ssumin! ML condition is satisfied, this will lead to a fall in net exports worsenin! the current account. -s lon! as the currency is overvalued, the current account will !et worst as imports will continue to rise and exports continue to fall. $isin. domesti" national in"ome E inflation 1 - risin! income may lead to hi!her demand for imports. 2he extent of the rise in imports due to a rise in the level of domestic income depends on the marginal propensit# to import. -t the same time, a risin! domestic income may lead to hi!her a!!re!ate demand and hence hi!her demand(pull inflation if the economy is operatin! at near or full employment output. 2his lowers the competitiveness of the country4s export if the country4s inflation rises at a faster rate than its competitors. +ence, with a rise in import expenditure and a fall in export revenue, the current account will decline. Link to the China4s case % causes of current account surplus likely to be due to an context % China undervalued currency and a rise in comparative advanta!e in labour intensive surplus and 9S industries due to low wa!e as a result of abundant labour. -s China is able to offer deficit low cost labour, many forei!n firms choose to relocate their operations especially the labour intensive industries to China as labour costs form the bulk of the overall cost and this will translate into lower cost of production leadin! to a fall in the prices of the !oods. - fall in the price of !oods will increase the export competitiveness of China and this lead to rise in export revenue if the demand for exports is price elastic. -s commodities prices rises, China is likely to experience a hi!her inflation rate compared to 9S and this will cause China to lose its export competitiveness. +owever, the overall cost of producin! the !oods is still much lower than that in 9S, hence, 9S will probably still import from China re!ardless of a hi!her price caused by inflation. 9S case % where consumption by households which is fuelled by easy availability ).

9&in)in. Pro"ess

Conclusion

Essay ("ontent( analysis and e'aluation) of credit and hi!h expenditure by !overnment due to a bud!et deficit lead to hi!h expenditure on imports, current account will tend to be in deficit. 9S also experience a loss in comparative advanta!e in labour intensive industries since wa!e cost is likely to be hi!h in a developed country. <isin! national income and easy credit allow hi!her consumption of imports. +i!her income per capita as a developed country also allows the citiNens to consume more imports relative to China which leads to a trade deficit. >ersistent current account deficit or surplus in not desirable in the lon! run as it may force the country to revalue or devalue its currency drastically. - lar!e chan!e in the country4s external value may cause disruption in the external sector which eventually may affect the internal sector of the economy in terms of employment, output and income level. 2his may cause painful adBustment in the internal sector of the country. +ence, there is a need for !overnment to intervene early.

WStudents may incorporate their application in the theory. Level L3 L) L& Description 2horou!h explanation on the causes affectin! the current account. Shows application in the China and 9S case. -ble to explain the causes affectin! the current account. Shows little or no application in the China and 9S case. Limited understandin! of the causes affectin! the current account Marks $(&' .(/ &(1

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China still keeps surplus of both the current account and the capital account in the first half of )''D. "b# -ssess whether surplus in both the current account and capital account are always beneficial for an economy. Command ord: Assess $hether reJuires the students to !ive economic reasons : analysis and to make a Bud!ment to see whether a surplus in both current and capital account is desirable. !ey ord: %urrent account and capital account ( Peed to explain the desirability of havin! current account surplus, capital account surplus and the combined effect of havin! both accounts surplus. Student may discuss any economy, however, !iven the preamble is in the context of China, students should at least attempt to have some discussion on China.

Question requirement 2his Juestion reJuires you to discuss the desirability of havin! a surplus in current and capital account. (,) %"&emati" Plan (to be done in ,/2 mins) Cntroduction Current account surplus % benefits and costs Capital account surplus % benefits and costs <esult of capital and current account surplus Conclusion (2) 8rite out t&e full essay (to be done by follo in. "losely to t&e outline in ,7 mins) 9&in)in. Pro"ess Cntroduction: Define key concepts Current account surplus Essay ("ontent( analysis and e'aluation) 2o assess whether surplus in both current and capital account are always beneficial for an economy will depend on the causes of the surplus, the siNe of the surplus and whether the surplus is persistent or not. *or current account to be in a surplus, receipts have to be !reater than payment. +ence, exports should exceed that of imports which result in a rise in net exports "H % M# leadin! to a rise in -D, throu!h multiplier process, a country will experience a rise in output and national income, improves S?L. 9nemployment will fall if the economy is operatin! below full employment output. +owever, if the economy is operatin! at near or full employment output, this may lead to demand pull inflation which is not desirable to the economy. Cf the current account surplus caused by an undervalued currency, it may not be desirable as the undervalued currency will keep the export competitiveness artificially low. 2his may encoura!e complacency for domestic firms which may lead to allocative inefficiency. -n undervalued currency also makes import prices relatively )$

9&in)in. Pro"ess

Essay ("ontent( analysis and e'aluation) more expensive and therefore reduces the country4s imports "if demand for imports is price elastic# and therefore lowers the S?L of the country.

Capital account surplus

Short term % Cf capital account surplus is caused by short term capital account surplus where hot money flows into the country, it may not be desirable as this may cause an increase in demand for domestic currency resultin! in an appreciation on the exchan!e rates. 2his may in turn affects the export competitiveness of a country. Lar!e inflow and outflow of hot money is normally not desirable to a country because it may cause hi!h fluctuations in the exchan!e rates which may disrupt the trade cycle of the country, makin! it difficult for exporter and importers to predict their profitability and therefore discoura!e investments which may limit the lon! run economic !rowth of the country, Lon! term % Cf capital account surplus arises from a rise in forei!n direct investments in the lon! term capital account, the country is likely to benefit from these investments as they are able to create Bobs and transfer the technolo!y now(how to the local workers and thereby increasin! the skills of the workers. Cnvestments increase the productive capacity of the country and hence able to sustain lon! run economic !rowth of a country. +owever, if forei!n direct investments come in at the time when the economy is operatin! at near or full employment output, this may lead to demand pull inflation which is not desirable. *orei!n direct investment may also crowd out small and medium siNe private domestic investment as these small firms are not able to compete with the multi(national companies in terms of siNe, cost and efficiency. - sudden relocation of MPCs firms to the lower cost countries may also cause hi!h unemployment in the country. Moreover, hi!h *DC may also cause an outflow of investment income in the current account in the years to come, causin! the E?> to deteriorate in future.

-pplication % both current and capital account results in a E?> surplus

Conclusion

- country may not be concerned about E?> surplus if the siNe of the surplus is small and temporary. +owever, Cn the case of China where both the current and capital accounts are in lar!e surplus, this will lead to a hu!e balance of payment surplus. -nd if the balance of payment account surplus is persistent, this will mean that China may face many challen!es like an overheatin! economy and an economy too reliant on exports and *DCs. Cf the economy is lar!ely driven by exports and *DCs, a fall in the world income may result in a sudden withdrawal in the investment and a fall in demand for exports resultin! in cyclical unemployment in China. +avin! a lar!e E?> surplus for China will also mean that her main tradin! partners will incur a hu!e deficit and this may invite protectionist measures from the tradin! partners which may slow down world economic !rowth. 2radin! partners may also force China to revalue their currency which may not be desirable for the export sector for China. 2herefore, China may need to move away from relyin! too much on *DCs and exports to drive their economy. Cnstead, they should focus on shiftin! more towards domestic consumption or diversify their export markets. . Cn conclusion, havin! a balance of surplus in the lon!er term may seem to be desirable as the country is able to accumulate forei!n reserves which may be useful to feud off any speculation in their currency or to finance their imports. +owever, if this hu!e surplus result in retaliation from tradin! partners, it may eventually also affects China4s domestic economy. +ence, in view of this, China may have to wei!h the pros and cons of havin! such a lar!e balance of payment )6

9&in)in. Pro"ess

Essay ("ontent( analysis and e'aluation) surplus and perhaps implement appropriate policies to deal with the ne!ative impacts of havin! this lar!e balance of payment surplus.

Fnowled!e, -pplication, 9nderstandin! and -nalysis Level 3 *or a well(developed answer that has ri!or in economic analysis. Sufficient depth and scope. Candidate is able to explain how a surplus in the current account and capital account may or may not be beneficial for an economy. Level ) Candidate is able to explain how a surplus in the current account and capital account may or may not be beneficial for an economy. Lack of depth or under(development in some areas. ?ne sided answer % max $ marks Discussion "benefits and costs# on only current account or capital account % max $ marks Level & Limited scope and depth. Candidate4s answer shows a lack of understandin! of the Juestion reJuirements. 0valuation 0) 5ood evaluative comments made with reference to the context of the Juestion. 2here is evidence of a sound synthesis. 0& Some evaluative comments made, however, these mi!ht not be adeJuately Bustified.

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