RAFFLES INSTITUTION

2021 YEAR 6 PRELIMINARY EXAMINATIONS

Higher 2

ECONOMICS 9757/01
Paper 1 Case Study
31 August 2021

2 hrs 15 minutes

Additional Materials: Answer Paper

READ THESE INSTRUCTIONS FIRST

Write your name, index number and civics class 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 diagrams, graphs or rough working.
Do not use paper clips, highlighters, glue or correction fluid.

Answer all questions.

The number of marks is given in brackets [ ] at the end of each question or part question.
Start each Case Study on a fresh sheet of paper.
At the end of the examination, fasten your answers to Case Study 1 and Case Study 2
separately.

Detach this cover page and secure it in front of answers to Case Study 1.

Question Marks
Name: _________________________
1 /30
Civics Class: ___________________
_____________________
Economics Tutor: ________________ 2 /30

This document consists of 10 printed pages and 2 blank pages.

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 2

BLANK PAGE

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 3

Question 1

The Airline Industry

Table 1: Annual GDP growth data (Average Annual % Change)

2000 – 2010 2010 - 2019

United Kingdom 1.79 1.8
World 3.00 2.82

Source: The World Bank

Chart 1: International flights to and from the UK by purpose (No. of flights)

Index (Base Year = 2000)
Visiting Friends and
300 Relatives (VFR)

250

200

150

Business
100

50

0
2000 2005 2010 2015 2019

Source: UK Office for National Statistics (adapted)

Chart 2: Airline profits

Source: www.iata.org

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 4

Extract 1: France plans 'eco-tax' for air fares

The European Union says that without any action, CO2 emissions from aviation are set to
grow by up to 300% by 2050.

France is set to introduce an "eco-tax" for all flights from French airports, the government has
said. The tax will only apply to outgoing flights and not to those flying into the country. The tax
is expected to raise about €180m from 2020, said Transport Minister Elisabeth Borne. The
amount of the tax will depend on the type of ticket being bought. Economy class tickets on
flights within France or the EU will have a tax of €1.50 imposed. Business class tickets for
flights out of the EU will have the highest tax of up to €18.

Source: www.bbc.com

Extract 2: Could Covid-19 shake up air travel for the better?

The collapse of passenger numbers and revenues will damage the industry. Yet previous
disruptions have shaken up the airlines to the benefit of the flying public. It could happen again.

Signs of recovery are scant. Not all air travel will recover at the same pace. Domestic flying
will continue its rebound, followed by regional international traffic. The last part of the industry
to refill its seats will be long-haul flying. This has a disproportionate impact on full-service
airlines that still rely most on long-haul international routes.

Airlines have responded by slashing costs, getting rid of staff and cutting fleets, yet carriers
continue to burn cash at a rate of $5bn-6bn a month. Looking at the cash and liquid assets of
carriers in mid-2020, the median airline had enough funding to last just eight-and-a-half
months, according to International Air Transport Association (IATA). Some big names have
succumbed. Norwegian Air Shuttle, one of Europe’s largest low-cost carriers, sought
bankruptcy protection in November 2020. Dozens of smaller airlines including FlyBe, a British
low-cost carrier, Virgin Australia and Avianca, based in Latin America, have also gone
bankrupt.

Moreover, full-service carriers rely especially heavily on lucrative business travelers, a sector
that may never recover fully, to subsidize seats at the back of the plane. If business customers
and feeder routes dwindle, the complex web of domestic and international flights becomes
harder to sustain, reducing connections and forcing up long-haul prices.

Not all will suffer. Those with sound business models and strong balance-sheets, such as
Ryanair in Europe, Southwest in America and AirAsia, are all low-cost carriers ready for a
rebound. British Airways has slashed costs and raised capital and is fast-tracking its previous
restructuring effort to compete with low-cost rivals. However, the Gulf carriers—Emirates,
Etihad and Qatar Airways—that have grown swiftly in recent years may struggle. They lack a
large domestic market to fall back on, unlike their Chinese competitors, and passengers may
prefer not to mix with people from all over the world as they change planes at vast airports in
the Gulf.

Source: The Economist, 11 February 2021 (adapted)

Extract 3: Cabin fever

Singapore Airlines launched a waiting list after tickets rapidly sold out for two weekends of
sittings onboard two stationary A380 superjumbos, with meals at seats and the chance to
watch a movie, albeit no longer in-flight. Guests will get a meal from the standard Singapore
Airlines menu, with S$642 (£360) buying the full works in a suite – or £30 per head for the tray

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 5

in economy. Diners in Singapore who missed out are able to pay S$888 (£501) for the airline’s
first-class dining experience at home, including delivery of tableware, slippers and amenity
kits. It is the latest in a line of revenue-raising initiatives by cash-strapped airlines, which have
collectively lost tens of billions during the pandemic.

“Flights to nowhere” have proved popular across Asia, with the Taiwanese carrier EVA selling
joyrides from Taipei and Japan’s ANA laying on Hawaii-themed flights after its service to
Honolulu was suspended. The Australian carrier Qantas recently swiftly sold out a sightseeing
trip on a 787 Dreamliner that flew around the country from Sydney and back.

Source: The Guardian, 12 October 2020

Extract 4: 25 Million Jobs at Risk with Airline Shutdown

In a scenario of severe travel restrictions lasting for three months, IATA research calculates
that 25 million jobs in aviation and related sectors are endangered across the world:

 11.2 million jobs in Asia-Pacific

 5.6 million jobs in Europe
 2.9 million jobs in Latin America
 2.0 million jobs in North America
 2.0 million jobs in Africa
 0.9 million jobs in the Middle East

“There are no words to adequately describe the devastating impact of COVID-19 on the airline
industry. Airlines must be viable businesses so that they can lead the recovery when the
pandemic is contained. A lifeline to the airlines now is critical,” said IATA’s director general
and CEO Alexandre de Juniac.

Source: www.iata.org

Extract 5: Financial Help for Airlines

The 2008-11 financial crisis saw governments around the world taking part or full ownership
in many banks and mortgage providers to ensure their survival. Inevitably, it is the taxpayer
that foots the bill, but in times of crisis, nationalization may be the only option to ensure the
survival of certain companies.

Governments are used to helping airlines for reasons of national pride and to maintain
international connections, and governments around the world have already stepped in to offer
extensive support packages to airlines. In Italy, the nation’s largest airline Alitalia has fallen
into government ownership for survival, again.

The countries that committed to financial relief for aviation early on in the crisis include
Australia, Brazil, China, Denmark, Hong Kong, Norway, Singapore, Sweden, and the United
States. The relief was divided into a few broad categories: wage subsidies, tax relief or other
subsidies. European countries implemented diverse financial packages. The French and
Dutch governments gave €10 billion to Air France/KLM, Germany agreed to a €9 billion rescue
deal for Lufthansa, and Sweden initiated a loan worth about €455 million. In Asia-Pacific,
various governments pledged support for aviation. Airport Authority Hong Kong (AAHK)
provided a HK$2 billion fund for the industry there, and the governments of Australia and
Thailand granted their airlines respite on charges and fees.

Sources: various

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 6

Questions

(a) (i) With reference to the data, explain whether travel for business or VFR is likely to have
a higher YED value. [3]

(ii) Identify and explain one other factor that could contribute to the difference observed in
Chart 1. [2]

(b) Explain why, when faced with a fall in demand, profits tend to decrease more
significantly if an industry has high fixed costs. [2]

(c) With the aid of a diagram, explain the impact of the imposition of eco-taxes in the
market for air-travel on consumer surplus, producer surplus and government tax
revenue. [5]

(d) Discuss whether budget airlines or full-service airlines are more likely to survive. [8]

(e) The pandemic has caused many airlines to face severe financial difficulties.

In view of the above, evaluate the benefits and costs of government intervention in the
airline industry. [10]

[Total: 30 marks]

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 7

Question 2
Saudi Arabia and Singapore

Chart 3: Global Crude Oil Prices (US Dollar/barrel)

$100

$80

$60

$40

$20

$0
2007 2008 2010 2012 2014 2016 2018 2020
2020

Source: www.ourworldindata.org

Extract 6: Why Gulf economies struggle to wean themselves off oil

Call it the world’s most important filling station. The complex of piers, artificial islands and
offshore moorings on the finger of land curling into the Gulf at Ras Tanura is the biggest oil-
export terminal of the world’s biggest oil exporter. For decades pumping oil and gas was all
Gulf states had to do to build skyscrapers and shopping malls, schools, hospitals and provide
citizens with enough benefits to keep them quiet.

Given high rates of population growth, real GDP per person in most countries of the Gulf Co-
operation Council (GCC) has been flat or in decline for decades. Productivity, the underlying
source of long-term growth, has been stagnant. The biggest problem, says Steffen Hertog of
the London School of Economics, is the Gulf’s distorted labour market. Many Gulf states like
Saudi Arabia give their citizens subsidised fuel, electricity and water, as well as loans or grants
for marriage and scholarships to expensive foreign universities. It spends more than most
comparable countries on education, yet achieves results that are markedly inferior. There is
no individual income tax scheme in Saudi Arabia.

Oil accounts for about 30% of GDP and 80% of government revenues in Gulf states on
average. Much non-oil output is dependent on petroleum revenues through government
spending on capital projects and salaries. And much of that public spending leaks out, through
imports of materials for firms and consumer goods, or because wages are spent on foreign
travel.

For Mr Hertog, Gulf countries face “a unique development trap” with a mix of expensive but
low-skilled national workers, cheap (but not cheap enough) imported labourers, and protected
domestic markets. One possible policy is to increase the number of Saudis in jobs by
squeezing out foreign workers. This could be done through a number of economic measures
like raising the cost of hiring foreigners and excluding them from a list of jobs. But getting Saudi
men to be productive requires them to undergo extensive on-the-job training.

Mr Zamil, one of many business owners, has discovered, to his delight, that Saudi women
make better workers: “more disciplined, more punctual and higher-quality work,” he says. He

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 8

has put up a wall in his air-conditioner factory to make a separate space for women, and has
moved it several times as their numbers have grown. (The legal system has strict laws
surrounding women and prohibits women working together with men.)

Another idea is to expand infrastructure to support new focus on industries such as those in
tourism and entertainment. However, Saudi Arabia ranks a poor 92nd in the World Bank’s
ease-of-doing-business index. The anti-corruption campaign does nothing to reassure would-
be partners, “What is the law in Saudi Arabia?” asks one diplomat. “The law is the last thing
the king said.”

Source: The Economist, 23 June 2018

Table 2: Labour Force Participation Rate* 2019

Saudi Arabia Singapore

Total 55.88% 70.51%
Male 78.39% 78.31%
Female 22.09% 62.07%

* Labour force participation rate refers to the proportion of the working-age population that is either
working or actively looking for a job. It is calculated as the labour force divided by the working age
population.

Source: The World Bank

Table 3: Key Economic Indicators of Saudi Arabia and Singapore

Saudi Arabia Singapore

GDP/capita (constant USD) 20542 59374
GDP/capita (PPP USD) 46962 98411
Unemployment rate (% of labour force) 6.13 3.1
Consumption expenditure (% of GDP) 63 46

Source: The World Bank

Extract 7: Is low growth the new normal for Singapore?

With estimates showing that Singapore’s GDP grew by 0.7 per cent in 2019, the Government
now forecasts that the economy will grow only within the range of 0.5 to 2.5 per cent in 2020.
As a small, open economy heavily dependent on external demand, Singapore’s national
output is subject to the vagaries of the global economy.

According to Singapore’s Population White Paper, the number of citizens in the working ages
of 20 to 64 years will start to decline due to more retiring and fewer entering the workforce, as
the number of babies dropped to an eight-year low in 2019.

While raising the retirement age, and boosting the labour force participation rate, particularly
of women, can attenuate this drag to some extent, it is unlikely to be enough to substantially
increase the total number of hours worked or even maintain current levels.

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 9

Singaporeans will also have to adapt to this changing nature of work, and undergo the
necessary training to gain relevant skills but this is not an easy task for older workers in their
50s and 60s.

A shrinking citizen workforce will also reduce the talent pool that Singapore can offer, which
could sway the calculations of multinationals deciding whether to locate their facilities here.
When the technology gap was huge, Singapore’s ability to attract multinational corporations
that brought the technological knowhow contributed to its GDP growth. With a narrower
technology gap now, Singapore has to expand its own capacity to innovate.

The Government has continued to place emphasis on building up enterprise research, with
over S$19 billion committed under the Research, Innovation and Enterprise 2020 plan.
Strengthening the eco-system to encourage new start-ups and growing the venture capital
industry are all necessary moves in fostering innovation. Singapore has been able to achieve
domestic social and political consensus to reinvent itself to ride on opportunities thrown up by
the global economy, and find new ways of overcoming our constraints.

Through government initiatives announced over recent Singapore Budgets, firms have also
been encouraged to embrace automation, digitalisation and reskilling, and rely less on foreign
labour in a manpower-lean economy.

Source: Channel News Asia, 20 January 2020

Extract 8: Inclusive Growth and Building Resilience

To pave the way for Singapore’s economy to emerge from the Covid-19 crisis stronger and
more resilient to future shocks, Deputy Prime Minister Heng Swee Keat unveiled a “refreshed
economic strategy” centred on innovation, inclusivity and sustainability.

This has become more of a challenge as Covid-19 has changed travel patterns, sharpened
the fragmentation of supply chains, and accelerated digitalisation worldwide.

To achieve this, the Government will launch a new five-year research, innovation and
enterprise plan that will build on earlier investments and enhance research to support areas
of national priority. It aims to create better jobs for workers and provide stronger support if they
fall and seeks to make the economy more resilient to future shocks. The aim is not just to grow
a vibrant, innovative economy, but an inclusive one, where growth uplifts all Singaporeans, Mr
Heng said.

“With Covid-19 revealing vulnerabilities in our labour market, we need to better understand its
structure, and upgrade jobs and skills across all segments of society,” he said. The
government will thus continue investing in helping every worker, at every age, continue to
improve their skills or pick up new ones, so that they can always get good jobs.

And as the world grapples with climate change, Mr Heng noted that environmental
sustainability is an important aspect of Singapore’s economic resilience for a low-carbon and
resource-constrained future. The Government will thus continue to invest in research into
energy and resource efficiency technologies, and encourage adoption of these technologies
through various incentives.

Source: Today, 5 October 2020

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 10

Questions

(a) (i) Describe the trend in crude oil prices between 2012 and 2020. [2]

(ii) Explain how the balance of trade of the Gulf states may be affected by the above trend.
[2]

(b) Explain the difference in the total labour force participation rate between Saudi Arabia
and Singapore. [3]

(c) With reference to Table 3, what does the data suggest about the cost of living in Saudi
Arabia as compared to that in Singapore. Justify your answer. [2]

(d) With reference to Extract 6 and your own knowledge, explain how you would expect
the size of the multiplier to differ between Saudi Arabia and Singapore. [3]

(e) Discuss whether Singapore has a higher standard of living than Saudi Arabia. [8]

(f) Discuss the view that inclusive and sustainable economic growth can be achieved
through “fostering innovation” in the Singapore economy. [10]

[Total: 30 marks]

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 11

Copyright Acknowledgements:

Table 1 © The World Bank, www.data.worldbank.org

Chart 1 © UK Office for National Statistics, https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-
insights/back-to-the-future-airline-sector-poised-for-change-post-covid-19#
Chart 2 © https://www.iata.org/contentassets/c81222d96c9a4e0bb4ff6ced0126f0bb/iata-annual-review-2020.pdf
Extract 1 © https://www.bbc.com/news/business-48922049
Extract 2 © https://www.economist.com/special-report/2021/02/11/could-covid-19-shake-up-air-travel-for-the-better
Extract 3 © https://www.theguardian.com/business/2020/oct/12/cabin-fever-tickets-for-meal-aboard-singapore-parked-
plane-sell-out\
Extract 4 © https://www.iata.org/contentassets/c81222d96c9a4e0bb4ff6ced0126f0bb/iata-annual-review-2020.pdf
Extract 5 © https://www.forbes.com/sites/jamesasquith/2020/04/01/could-airlines-be-nationalised-as-italy-takes-full-
ownership-of-alitalia-will-more-airlines-follow/?sh=4d602b9577df,
https://www.iata.org/contentassets/c81222d96c9a4e0bb4ff6ced0126f0bb/iata-annual-review-2020.pdf
Chart 3 © https://ourworldindata.org/grapher/crude-oil-prices
Extract 6 © https://www.economist.com/special-report/2018/06/21/why-gulf-economies-struggle-to-wean-themselves-off-oil
Table 2 © The World Bank, www.data.worldbank.org
Table 3 © The World Bank, www.data.worldbank.org
Extract 7 © https://www.channelnewsasia.com/commentary/low-economic-growth-new-normal-singapore-budget-784546
wave/#332433406a7d
Extract 8 © https://www.todayonline.com/singapore/inclusive-growth-building-resilience-part-refreshed-economic-strategy-
recover-covid-19

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over

 12

BLANK PAGE

© RI 2021 9757/01/Prelim/Y6/2021 [Turn over