PJC Prelims 2010 CSQ1: Developments in the PC Industry (a) (i) Compare the change in market shares of Worldwide PC Shipments of Dell with that of HP from 2005 to 2008. (2) Difference (1) Dell experienced a decrease in market share while HP experienced an increase in market share. Similarity (1) Both Dell and HPs market share increased from 2007 to 2008. (a) (ii) With the aid of a diagram, explain the impact of the change in market share on the profits of HP. (6) Increase in Dd (AR / MR shifts right) (1) More Inelastic Dd (1) Increase in market share Dd increases Fall in Costs (Accept movement along LRAC OR shift of MC/AC) (1) With larger market ability to reap EOS cost decreases Increase in profits (1) FROM P1C1BA TO P2C2ED

AC2

Price/Revenue/Cost

Output

AR2 MR1 AR1

AC1

MR2

P1 C1 E

D

A

BC2

MC2

MC1

P2

(b) In view of the possible merger with Gateway, explain how size and global presence enable Acer to compete with the two American heavyweights, Hewlett-Packard (HP) and Dell. (4) Cost advantage (2) Evidence Extract 1: it sells through retail and has put an emphasis on design and marketing Explaining in economic terms Marketing economies of scale: Advertising costs / Design costs can be distributed over a larger output, reducing average costs of production. Answering the question Allows firm to price more competitively. Revenue advantage (2) Evidence Extract 1 buying Gateway will boost Acer's presence in America Explaining in economic terms Presence in the US markets influences ability of the firm to influence tastes and preferences and thus enable Acer to make consumers in the market switch to Acer hence increasing the demand for its products and increasing its market share and revenue. Answering the question Higher TR increases profits thus enabling Acer to engage in more R&D to compete more effectively with the development of new products.

(c) Discuss whether the rise in e-waste dumping is a result of non-price competition by PC-makers (8) Introduction Highlight that from Extract 3 Paragraph 1, there has been a marked annual increase in e-waste dumping. The rise of e-waste dumping can be attributed to a number of factors apart from non-price competition.

Explaining that PC industry engage in non-price competition Oligopoly market concentration ratio of 5 firms ~ 50% thus firms will not raise prices as they fear other firms will not follow and firms dont lower prices below the current mkt price because other firms will follow and result in a price war (harms all firms involved). Therefore they tend not to engage in price competition but rather Non price competition (evidence Extract 2 para 1).

Thesis: The rise in e-waste dumping is a result of non-price competition. Evidence Extract 1 Paragraph 2 & 4, HP and Dell have been aggressively engaging in product differentiation to improve upon the design of their machines, resulting in intense competition between themselves and the other PC makers. Explaining Consumers will therefore switch between the more differentiated and updated electronic products, leading to an increase in worldwide demand for electronic products which accounts for the rise in e-waste dumping. Evidence Extract 1 Paragraph 2 and Extract 2 Paragraph 2, there has been a rise in emphasis on how PC makers sell and market their products. For instance, HP has made use of a vast network of retail partners to sell its laptops while Dell has also relied on Wal-Mart to market its laptops to the public. Explaining This is a form of non-price competition whereby PC makers are adopting to make their product more convenient and accessible to the public, increasing their products visibility and exposure. This sort of marketing strategy is a form of product differentiation whereby firms create an imaginary difference to their products, hoping to generate higher sales revenue as demand is made more price inelastic with aggressive marketing tactics. Non-price competition raises consumers demand for PC

Anti-thesis: The rise in e-waste dumping can be attributed to other factors apart

from non-price competition efforts by the PC makers Evidence 1 Extract 1 Paragraph 1, emerging economies such as India and China are experiencing an increase in income, especially for their middle classes. Explaining in economic terms Assuming laptops are normal goods (YED>0), with a rise in income, demand for computers will rise. This will result in more e-waste dumping as sale of laptops rises. Evidence 2 Extract 1 Paragraph 1 and Extract 3 Paragraph 1, businesses have also relied more on laptops and computer technologies for their operations. Explaining in economics terms This increases the demand for the product and makes the PED for laptops more inelastic. Therefore, it will lead to a higher worldwide demand for laptops, resulting in more e-waste dumping as businesses consume more laptops and change their computer technologies more often to keep up with the changing times (to increase their productive efficiency as well). Evidence 3 Extract 3 Paragraph 1, the dumping of e-waste is causing serious health problems for inhabitants. Explaining in economic terms Presence of imperfect information can also result in market failure in the dumping of e-waste. Due to ignorance of external costs from e-waste dumping, producers and consumers may produce and consume electronic products beyond the socially optimal level, resulting in excessive e-waste dumping. Conclusion There has been a wide array of factors that has resulted in a worldwide annual increase in e-waste dumping and it cannot be attributed to non-price competition efforts from the PC makers entirely. Rising affluence from the middle classes in emerging economies such as India and China and the fact that computers and laptops have become part and parcel role in businesses play a significant role too in the rise of e-waste dumping.

(d) With reference to the case study and your own knowledge, propose and evaluate policy options to correct the market failure caused by e-waste dumping. (10)

Market-based solution From Extract 3 Paragraph 2, the EU has formulated a directive to ensure that producers of electronic products bear the full cost of e-waste disposal. This will ensure that the full cost of e-waste dumping is internalized by the producers of electronic products. PMC will converge onto SMC if EMC is correctly estimated by the relevant authorities. This will reduce production of electronic products to a socially optimal level (as firms face higher COP) and minimize deadweight loss. In addition, the extra revenue collected by the government can be used to build recycling centers, to fund public campaigns to raise awareness regarding the external costs of e-waste dumping or to fund the setting up of a comprehensive checking regime to ensure that there will not be an excessive amount of electronic products being shipped out of EU. This policy is easy to implement and the additional cost charged to producers can be easily adjusted. Limitation 1. However, EMC may not be easily estimated and quantified. Overestimation of the

EMC may result in underproduction of electronic products which may lead to a loss of welfare for the society.

Non-market based policy From Extract 3 Paragraph 2, EU has also implemented rules and regulations to control the movement of e-waste for recycling and bans its export for disposal. This is a measure to directly reduce the level of e-waste dumping to a socially desirable level as the government attempts to address the loopholes in monitoring of the electronic goods that are shipped out of the EU. Limitation However, this measure may incur a large amount of administrative costs as the implementation of a strict checking regime requires more manpower and capital resources. In Extract 3 para 3, the lack of monitoring renders regulation ineffective.

Long term policy Government can also implement policies targeted at moral suasion such as public campaigns to raise awareness regarding the external cost resulting from excessive e-waste dumping. This may lead to consumers voluntarily reducing their consumption of electronic products. Limitation However, the effect of this policy is uncertain and unpredictable. To complement the above policy, the government can provide more R&D grants to electronic firms for them to develop greener technology which will hopefully reduce the negative externalities in the disposal of electronic products. This will ensure that the benefits of consuming electronic goods can continue to be reaped by consumers as well as ensuring that the environmental degradation does not worsen.

Conclusion To correct the market failure caused by e-waste dumping, the government has to implement a mixture of short term and long term policies that targets the main causes of market failure in e-waste dumping.

AJC Prelims 2010 CSQ2: In sickness and in health? A look at Germany and Greece

(a) (i) With reference to Tables 2 and 3, compare the trend in real GDP growth for Germany and Greece over the period 2006 to 2009.

[2]

Similarity: Both Germany and Greece experienced a fall in real GDP growth over the period 2006 to 2009. Difference: But the real GDP growth rates for Germany declined more significantly than that of Greece.

(ii) How far can we conclude that Germany has a higher material standard of living than Greece?

[4]

Thesis: We can conclude that Germany has a higher material standard of living than Greece As mentioned in Ext 6, The German economy grew at the most rapid rate since reunification. In addition, consumer spending has expanded and the Germans are also buying more goods and services from other countries. Citizens in Greece, on the other hand, may not enjoy as much goods and services. This is because persistently high inflation is likely to erode consumer spending (Ext 8, para 5). In addition, the high unemployment rates as shown in Table 3 imply a fall in consumers ability to purchase goods and services There, we conclude that Germany has a higher material standard of living than Greece.

Anti-thesis: We cannot conclude that Germany has a higher material standard of living than Greece However, the information provided is insufficient.

Information on how equitable income is distributed in these two countries and the composition of GDP would be necessary before we can accurately conclude that Germany indeed has a higher material standard of living than Greece.

1m 1m 1m 1m

(b) (i) Using AD-AS analysis, explain clearly how austerity and cutback policies have aggravated the recession as stated in Extract 8.

[4]

The recession in Greece means that the Greek economy is experiencing negative growth.

The austerity and cutback policies include an increase in indirect tax and a reduction in government spending. Public sector wages and pensions are also reduced.

The cut in wages reduces consumers income which leads to a fall in consumer spending (C) (which is a component of aggregate demand).

The increase in indirect tax curtails private consumption (C) and the decrease in public consumption mean a fall in government spending (G).

With the fall in both C and G, AD falls further, aggravating the recession as GDP shrinks further.

1m 1m 1m 1m

(ii) Explain what is meant by unemployment is a lagging indicator. [2]

When firms confidence is very low, production will be cut back. A fall in national output and national income lead to a fall in the demand for goods and services. With a fall in consumption, the demand for labour falls since the demand for labour (workers) is a derived demand.

The national output first falls before we see a fall in employment, hence, unemployment is a lagging indicator.

Award 2 marks ONLY if the candidate explains the link between the fall in national income and hence, the rise in unemployment.

(c) In the light of the data provided, assess the relative success of Germany and Greece in recovering from a global financial crisis.

[8]

Introduction engagement with statistics and data The global financial crisis hit the world economies (Ext 5) in 2007 and 2008. Both Germany

and Greece experienced a negative impact on their economies as reflected by the decline in real GDP growth rates from 2007 to 2009 (Tables 2 & 3).

The fall in Germanys economic growth was sharper than that of Greece between 2008 and

2009 (Table 2). Thesis: Germany is relatively MORE successful in recovering from a global crisis Germany recovered from the crisis unscathed as its economy is largely export-led (Ext 6

para 3) with exports accounting for 41% of German GDP in 2009. In fact, Germany (which is the European Unions largest economy) is the reason for

the strongest pace of growth in the EU economy since the global financial crisis. An improving global economy will lead to a higher demand for German exports and

a self-sustained recovery is expected for Germany. (Ext 6) Greece, on the other hand, has high household final consumption expenditure as a

percentage of GDP (Table 3). Due to rising unemployment and contracting credit conditions, consumption which is the main driver of the Greek economy is falling (Ext 8, para 5 & 6). Being dependent on domestic sectors, Greece does not benefit as much as Germany from the global recovery.

In addition, Greece has to deal with a severe debt crisis (Ext 8).

Greece has agreed to a three-year austerity and deficit-slashing programs together with structural reforms in exchange for a bailout from the IMF and the EU.

Anti-thesis: Germany is relatively LESS successful in recovering from a global crisis Notwithstanding the above, we must note that Germany and Greece are both in the EU.

Germany may experience a slowdown, that is, the German economy is expected to grow at a slower pace (Ext 6). This is because of the bailout program for Greece which Germany inevitably has to bear in being in the EU.

There could also be a risk of a second financial crisis with countries being insolvent and

being forced out of the Euro, and banks collapsing. (Ext 7, para 2) Germany would also have to bear the consequences of lower exports. France, Italy, Belgium and Spain are among the 11 largest export partners of

Germany (Ext 8, para 2) and it is clear that Germany will be affected by any financial crisis.

Stand / Judgment / Final Evaluation Ultimately, Greece has to grow its external sector and not depend on domestic consumption to drive its economy. Tourism is the service sector which Greece depends on (Extract 8) but it is highly susceptible to external shocks, unlike Germanys exports which are mainly manufactured goods. On the whole, Germany is indeed more successful in recovering from the global financial crisis than Greece.

Knowledge, Application, Understanding and Analysis L3 For a thorough and balanced answer to assess the relative success of Germany

and Greece in recovering from a global financial crisis. Good reference to case material and good evaluative comments made.

7-8m

L2 For an answer with an undeveloped explanation of the relative success of Germany and Greece in recovering from a global financial crisis. Some reference to case material. No/little evaluative comments made.

4-6 m

L1 For a superficial and /or one-sided answer that shows some knowledge of the question requirements. Very limited/no reference to case material.

1-3 m

(d) Discuss and compare the likely impact of the change in the exchange rate of the Euro on the German and Greek economies.

[10]

Table 4: Average Rates of Euro/US$

2006 2007 2008 2009 1.26 1.37 1.47 1.39

Source: European Central Bank NOTE: The correct way to read Euro/US$ is Euro per US$. So based on the table, in 2006, US$1 can buy 1.26 and in 2009, US$1 can buy 1.39. This would have suggested that the has depreciated. HOWEVER, from our own knowledge, it cannot be the case. It is more logical that 1 can buy US$1.26, then the other way round!! So Table 4 should be changed as follows:

Table 4: Average Rates of US$/Euro 2006 2007 2008 2009 1.26 1.37 1.47 1.39

Source: European Central Bank Now, this means that in 2006, 1 can buy US$1.26 and in 2009, 1 can buy US$1.39. So in other words, the has appreciated. Introduction The has generally depreciated against the US$ (for the period 2008 to 2009). (Table 4).

This depreciation of the Euro will have an impact on economic growth, inflation, unemployment and the balance of payments position (4 macroeconomic objectives) of both the German and Greek economies.

Positive impact for Germany(Ext 7) With a depreciating Euro, European exports will be more competitive since the foreign

price of their exports falls. If the demand for Germanys exports is price elastic, a fall in the foreign price of exports will bring about a more than proportionate rise in the quantity demanded for Germanys exports. Export revenue thus increases.

The trade surplus of the German economy is likely to increase further from the relatively

high figure of 60.2 billion euro (Table 5). As mentioned in Extract 6, the trade surplus is expected to widen. A stronger balance of trade position is achieved. The balance of payments position improves, ceteris paribus.

Given that exports are more competitive, aggregate demand (AD) increases as well

(assuming import expenditure remains unchanged). Higher economic growth may be achieved by the German economy. With the increase in national income (which is largely due to the rise in exports), the unemployment rate in Germany is likely to fall.

Negative impact for Germany

Due to increase in AD, the German economy will experience higher inflation rates. Higher energy and food prices could lead to greater inflationary pressures on the German

economy given a weaker Euro. The extent of growth in exports as a result of a depreciating Euro may be limited by the fact

that the largest export partners of Germany are in the EU. Positive impact for Greece In the case of the Greek economy, the depreciating Euro may mean an increase in the

number of tourists visiting Greece. For instance, Americans will find it relatively cheaper to visit Greece than before since

the Euro has weakened against the US$. Again, national income and employment may rise from this increase in exports.

The deficit balance of trade position for Greece may improve given that consumers income is reduced through taxes. In addition, a higher unemployment rate is expected and this means a reduction or no income for some consumers, hence curtailing imports further

Negative impact for Greece The Greek economy may experience higher inflation rates due to the increase in AD but its

effects will not be significant due to the reasons below. A depreciating Euro is unlikely to stimulate the Greek economy or generate employment

since the main driver of its GDP is consumption rather than exports (which is the case for Germany). From Table 5, the growth in exports for Greece was only 1%, compared to Germanys 15% for the given period.

The Greek economy which is in a deep economic crisis (Ext 8) is likely to experience a

deep recession and a sharper rise in unemployment. The economic contraction in Greece as a result of higher taxes and a fall in government

expenditure will reduce consumption. Hence, there is no growth to speak of in the case of the Greek economy.

In addition, the increase in indirect taxes (Ext 8) with the objective of cutting deficits will lead to higher prices of goods and services, hence, increasing inflation rates.

The depreciating Euro may lead to a greater lack of confidence in the currency. This would

aggravate the debt crisis which the Greek economy has to deal with. Comparison Both the German and Greek economies will experience higher inflation rates. However, the

impact of the depreciating Euro on the general price level is greater on the German economy since imports grow at a faster rate compared to the Greek economy (Table 5). Higher energy and food prices could lead to greater inflationary pressures on the

German economy given a weaker Euro. Stand / Judgment / Final Evaluation On the whole, the depreciating Euro would make European exports more competitive and

the Germany economy would be able to increase employment, raise wages and this may stimulate exports from other EU countries (Ext 7), hence, increasing national income and employment.

Mark Scheme for part (d)

Knowledge, Application, Understanding and Analysis

L3 For a competent discussion on the likely impact of a depreciation of the Euro on the German and Greek economies. Good reference to case material.

6-8 m

L2 For an answer with an undeveloped comparison of the likely impact of a depreciation of the euro on the German and Greek economies. Some reference to case material.

4-5 m

L1 For a superficial answer that shows some knowledge of the question requirements. Very limited/no reference to case material.

1-3 m

Evaluation E2 Evaluative comments with justification. 2m

E1 Evaluative comments, unexplained. 1m

RI Prelims 2010 CSQ2: Gross Domestic Product and Economic Growth a Using the data in Table 3:

i. Identify and explain the indicator used to measure the economic growth of a country.

[2]

Identify: GDP at 2005 market prices DO NOT change to real GDP Explain: Effects of inflation are removed or eliminated. AVOID takes into account inflation as its ambiguous in Cambridge markers opinion To score the second mark, students must show their understanding of / explain real Mere statement that GDP at 2005 prices is real GDP without explanation

1m 1m

ii. Summarize the trend in Singapores economic growth rate from 2006 to 2009.

[2]

Decreasing growth rate (overall trend) Reaching negative 1.3% in 2009 / recession in 2009 (refinement)

1m 1m

b Comment on the success of Singapores stated goal to remake itself as a high value-

added, high tech growth hub for manufacturing from 2006 to 2008.

[4]

Thesis: Singapore has been able to achieve the stated goal of remaking herself as a value-added, high tech growth hub for manufacturing Fig 1: re-exports re-exports have been increasing from 2006 to 2008. If we assume that her

re-exports consist of high value-added, tech products which the manufacturing industry has transformed from imported raw material and intermediate goods like crude oil to refined petroleum products, imported industrial parts into telecoms equipment etc, then the stated is achieved.

Ext 4: continue to attract high-quality investment suggesting Anti-thesis: Goal has not been achieved Fig 1: question type of re-exports; in this case goal not achieved if re-exports are just those

under entreport trade Table 3: Trend of falling contribution to GDP by the manufacturing sector Table 3: Fall in labour productivity makes the goal of high tech hub questionable as

greater technology and capital deepening should have contributed to increase in labour productivity

Evaluative comment More data needed (e.g. type of manufacturing activities, value-added by various

manufacturing industries) before any conclusion can be made about whether stated goal achieved.

Slowdown in growth may not have been due to failure of manufacturing sector but other factors like the global recession which affected all countries.

Note: 2m for thesis, 2m for anti-thesis. No conclusion: max 3m. No reference to case material: max 2m; Limited scope: max 2m.

2m 2m

Examiners Comments: A badly attempted question as many candidates did not really understand the term value added and simply quoted data without explanation. Value-added usually refers to value of the firms output minus the value of all its inputs purchased from other firms. High value added products include telecommunications equipment, software, high- tech machines, electronic components, automobile parts refined petroleum products, electronics (primarily disk drives and computer-related products) and services. High value-added production is associated with capital-intensive and technology-intensive industries while low value-added production is associated with labour-intensive industries like garment industry. In Singapore, manufacturing now contributes to about 25% to the Gross Domestic Product (GDP). As Singapore has moved up the value-added chain, labor-intensive industries have moved offshore and the high-tech, IPR intensive electronics and pharmaceutical sectors have taken a larger share of total sector output. Other examples that can be considered: Import of unprocessed water and treatment of the water. Most students write that GDP has been increasing and hence, this shows Singapore has been successful in remaking herself into a high value added and high tech growth hub. However, it is not sufficient to say GDP has been increasing because the increase in GDP could be due to strong external demand (X-M). In addition, the increase in GDP could be due to contributions by the construction sector or service sector etc. Hence if you want to use this point, you need to explain why high value added manufacturing can lead to increase in GDP. There are also other indicators that address the issue more directly like manufacturings contribution to GDP. However, it is also not sufficient to say manufacturings contribution to GDP has been increasing because firstly, while in absolute terms it has increased, in percentage terms it has fallen. Hence in percentage terms, it seems like Singapore has not been successful in remaking herself as a high value-added, high tech growth hub for manufacturing; Secondly, we are not given information on the type of manufactured products Singapore is engaged in, hence we need information on that. For example, based on general knowledge, we know that Singapore is importing unprocessed water and treating the unprocessed water into drinkable water using advanced technology, in fact we are even exporting technology in the treatment of water, like desalination of sea water, recycling of used water. Other examples include processing crude oil into refined oil and refined petroleum products; pharmaceuticals; biotechnology industries Students also wrote that productivity has been falling to indicate that Singapore has not been successful in remaking herself into a high value added and high tech growth hub. However, it is not sufficient to say productivity has been falling so Singapore is not successful in remaking herself into high value added high tech manufacturing hub because there is a need to explain why a fall in productivity reflects a failure to remake herself into high value added high manufacturing hub. For example, a common way to improve labour productivity is to equip the workforce with better capital equipment and technology so that each worker will be more efficient in producing the good in a given time period and hence able to produce more units of the good in a given time period. Hence if Singapore is successful in remaking herself into a high value added high tech manufacturing hub which requires capital intensive and technology intensive equipment and processes, labour productivity would not have fallen. Reasons contributing to falling labour productivity include increased uncertainty and climate of fear in the economy which affects the incentive to invest and hence the quality of capital goods, innovation and technology levels; lower investment in health and safety and education which can also affect the quality of labour. In Singapore, one of the main reasons why productivity has been falling is due to the slowing or stagnant levels of new capital investment. This is most probably due to easy availability of low cost foreign workers which resulted in employers having less incentive to upgrade operations and upgrade the skills of workers because employers can cut labour cost by employing low cost foreign workers rather than invest in innovation to boost productivity.

c With the help of a diagram, suggest two reasons to account for Singapores growth rate in

2009.

[6]

Recession in 2009 as result of decline in AD & AS Fall in AD Ext 7: Decline in global demand due to global recession (falling incomes of trading partners) Table 3: Appreciation of S$ led to loss in export price competitiveness Effect: Fall in X (trade surplus fell), leading to a fall in AD, fall in real national income via

multiplier. Diagrammatically, there is a leftward shift of the AD curve

Fall in AS: Table 3: Falling labour productivity implies rising unit cost of production in the short run Effect: Fall in AS, fall in real national income Diagrammatically, there is a leftward shift of the AS curve AD/AS diagram (1m each for the correct shift in AD & AS) If the 2 reasons are either AD or AS: max 2m

2m 2m 2m

Examiners Comments: Many candidates scored well for this question and made good use of the AD-AS framework together with case evidence in answering the question. Those who used the Y=AE model were unable to score the full range of marks as the model is insufficient in capturing supply-side analysis. The same goes for those who wrote about domestic consumption falling over the period. Candidates must remember that a fall in consumption did not constitute a cause as the root cause had yet to be addressed. This notwithstanding, domestic consumption is an insignificant component of Aggregate Demand. It was puzzling that a fair number of the candidates could not identify the fall in the external demand (export) as a result of the financial crisis and thus a contraction in the demand from US and Europe (our major trading partners) as the reason though the clues were written all over the extracts about Singapores export-reliance. As for supply-side analysis, the one obvious cause was the fall in productivity which most candidates were able to pick out. However, some lost marks because of their over-simplistic explanation or lack of attempt to relate this fall to the unit (labour) cost.

d To what extent might reducing reliance on foreign labour help to improve labour productivity

and sustain economic growth?

[6]

Define: Labour productivity: the quantity of output per unit of labour (i.e man-hour) Sustained economic growth: both short run (actual) and long run (potential) growth

Thesis: May improve productivity & sustain economic growth Foreign workers are used due to the relatively lower wage paid to such workers. Ceteris paribus,

theres little incentive to engage in capital deepening (cheaper to employ more foreign workers than buying capital equipment) nor sending them for training on contractual term (too short a time frame to recoup cost of training)

Ext 6: employers opt for the easy way out hiring more foreign workers instead of boosting labour productivity

With increased foreign worker levy, firms will be induced to employ / substitute with local workers OR adopt new ways of improving production methods (i.e. capital substitution)

As it cost more to employ foreign workers, there is greater incentive to improve productivity of local

workers to bring down or keep the unit labour cost constant. Ext 5: firms will get more out of fewer workers. This can be done via training & education and increase

capital deepening. With higher productivity and increased productive capacity, AS shifts down and right allowing for both

actual and potential growth to be realized. Also any increase in AD can be absorbed so as to dampen inflationary pressures

Anti-thesis: May not increase productivity & Economic Growth Ext 5 & 6: reducing reliance on foreign workers may lead to increase in cost of production, especially

for the construction and marine sectors as locals shun jobs in these sectors. The cost of using foreign workers will rise as locals shun jobs in these sectors. The cost of using foreign workers will rise as firms are unable to substitute local labour or machines for the foreign workers.

Due to rise in costs, firms are forced to relocate to other countries where workers are cheaper and readily available, thus leading to a decline in GDP and productivity instead. This rise in cost results in reduced price competitiveness. When (X-M) falls, this will lead to a huge fall in GDP due to Singapores heavy reliance of export oriented growth.

Given an ageing population and falling birth rate, the absence of foreign workers will further reduce the workforce. AS falls and GDP declines, both in the short and long term.

Evaluation / Synthesis:

The links between foreign workers, productivity and economic growth is not so simple. Even if supply of foreign workers is reduced in Singapore, this may not result in higher productivity of local workers and growth.

Ext 4: Japan does not rely on foreign workers, has high productivity in most industries and yet has low or stagnant growth.

Thus, the policy of increasing the foreign worker levy needs to be adopted at a gradual pace to allow firms to adjust to the higher levy.

If the governments objective is to sustain a 7-8% growth rate, such a policy is not viable given our declining workforce.

Examiners Comments: It was obvious that the concept of productivity was not well-understood by many of the students. There were many cases where it was thought to be synonymous with production (i.e total output). Because of this failure to understand the concept of productivity, many flawed causal links were made. For instance, with higher wages, workers are more inclined to work harder due to the higher income earned; thereby improving the productivity as the quantity of work increases. Candidates must know that working harder may not translate into higher productivity. There is also the mistaken notion of many that reducing reliance on foreign labour could encourage local workers to go for skills upgrading. Why this is so and how this is done were not explained. Many candidates quoted case evidence without linking it to an economics framework. The result is a lack of rigour in their explanation. Some candidates also failed to recognize that they had to relate sustained economic growth to potential growth in their discussion. Hence their arguments tended to focus on actual growth only. The explanation of how reducing foreign labour might increase labour productivity was also badly done. Many also saw foreign labour as equivalent to foreign talent. This is incorrect. There was not enough thought put into the issue of how productivity could affect costs and how this relationship between productivity and costs could have an impact on economic growth. Most looked at the issue of productivity change and economic growth in isolation i.e as two unconnected and separate issues. Though there is a relationship between wage rates and productivity, many were unable to explain this causal link correctly. To these weaker candidates, the higher wage would result in higher productivity. Such an argument is erroneous. Candidates must understand that it is the productivity that determines the wage rate; otherwise the way to grow productivity is to increase the wage rate and this is clearly not the way to go! Failure to elaborate on quoted statements and a general assumption that the quotation was the answer and therefore sufficient to address the issue. For example, reducing the reliance on foreign workers will lead to higher productivity as companies will get more of fewer workers. It is the candidates job to explain how and why this is so!

e Assess whether an intensification of globalization in Asia is a better growth model compared

to one that looks to the domestic market.

[10]

Clarify key terms: Better? For whom? - Consider small open economy like Singapore vs a big economy like China Explain the term intensification of globalization in Asia (found in Ext 8)

Maintain exports as a key driver of growth Look to opening up of Asian markets for both export and import to propel the burgeoning region

forward i.e deeper regional economic integration Target goal: sustained economic growth: both short run (actual) and long-run (potential) growth.

Thesis: Intensification of globalization in Asia is a better growth model: Growth due to potential Asian export market The significant growth of China and India presents provides a potential large market for other Asian countries exports Ext 9: potentially large demand in China and India, three (including Japan) of the worlds four largest economies will be located there This will provide Asian countries with:

Opportunities to continue to practice specialization on a world-wide scale based on Theory of Comparative Advantage: economies of large scale production can be enjoyed, hence more efficient use of resources

Greater incentive to stay competitive, could possibly lead to higher domestic investment, leads to growth of domestic firms can counter dipping share of contribution from local companies to growth figures (Ext 7).

Opportunities to have deeper integration in Asia possibly make it easier for local companies to venture into the other Asias markets and established themselves. This is beneficial as profits would be repatriated back to Singapore and circulated within the economy.

Growth due to potential Asian import market

With globalization, there are greater opportunities for more input flows within the region. This will benefit small and resource scarce countries like Singapore who need components, raw material and foreign labour for growth

Even big economies like China and India should consider also opening up their own markets and start buying more imports from other countries in Asia. This generates revenue and growth for these countries who are selling to China and India, in turn leads to increase demand for exports from China and India.

Hence focus of intensification of globalization in Asia is about turning to Asia: pick up slack in external demand from the North American & European economies and growth and at the same time also buying more imports from Asian partners to reap potential mutual benefits. (Ext 8)

Evaluation: However, depending on Asian markets may not lead to growth.

The Asian markets may not have the buying power of the Western markets. The Asian economies may not have the high tech inputs (skilled labour and level of technology

embodied in capital equipment) that the West has. Export-led growth may put more inflationary pressure on wage and other costs if the country is

near full employment. This again highlights the importance of productivity improvement especially in the case of Singapore. With a small population, there is a limit to the number of people available to enter the workforce (Ext 5) and hence potential growth.

Anti-thesis: Pure focus on domestic market to propel growth is a better model Domestic market can take up the slack in trade of goods. (AD increases) especially for big

economies like China given the huge population size and hence consumption base to fall back on. Demand from Europe and North America slowing down. Ext 8: 1% growth for Germany and other Euro zone countries and United States 3.3% growth this year whereas Asia is expected to grow by 7.5%

Domestic market can take up the slack in trade of services. (AD increases) A stronger services sector which is expected to make up 70% of output in future would help to temper volatility due to electronics cycles, domestic industrial restructuring (Ext 7). However, for countries like Singapore where the manufacturing pillar is a key engine of growth, it may not be advisable to move away from manufacturing. This is because there is little scope for value-adding in the services sector relative to the manufacturing sector. Moving up the technology and value-added ladder is crucial in enhancing growth as comparative advantage shifts.

Domestic market is more stable: Reduced vulnerability is important as evidence has shown that the recessions faced by Asian countries have been to no small extent linked to the dependence on the West. Ext 9: dependence on trade through regional production networks and export-led growth strategies made them vulnerable to the sharp contraction of demand from the North American and European economies. Ext 7: Singapore's heavy reliance on global trade resulted in it being the first few economies to slide into a recession during the recent global economic crisis

Domestic market creates more linkages for local firms (external economies of scale): A larger domestic market (especially in the services sectors) allows more scope for domestic enterprises to arise and develop, first by serving a larger home market, and then expanding abroad. (BreadTalk, Sakae Sushi and Charles & Keith are some examples in Singapore). This can counter dipping share of contribution from local companies to growth figures. Ext 7: moderating reliance on MNC-driven growth for Singapore makes us less vulnerable when FDIs pull out of the economy.

Domestic market will result in less future outflow of financial capital (external stability in the future): growth of local enterprises also means that firm's profits are likely to be recycled among the local population as wages, thus boosting consumption in the domestic market (targeting an inclusive growth).

Evaluation: However, depending on domestic market may not always work

Small economies like Singapore: focusing purely on domestic markets not an option as domestic market is too small to sustain growth. Moreover, from Ext 7, domestic consumption has been falling and is low (

Note: It is not necessary for students to cover all 3 aspects of globalization as there is no supporting case

material for all 3 areas (e.g labour flows). However, students must include i) trade and ii) FDIs in their discussion.

Examiners Comments: Many candidates misinterpreted the question and changed the question to pros and cons of globalization and protectionism. A large number of candidates just conveniently regurgitated the pros and cons of globalization from their notes without addressing the term intensification of globalization in Asia. Hence they answered the question as though it was an essay question on globalization in general, ignoring the use of case evidence. The weaker answers showed a lack of focus on growth and digressed into the other macroeconomic goals. As a result, the answer was a hodge podge of points that were not relevant to the issue. It was also the weaker candidates who view the entire issue from Singapores perspective. In so doing, they left out the major consideration of size of the economy and domestic market as a criterion for making an assessment of the 2 models. Many candidates failed to surface evidence to support their analysis and assessment. There was a lack of rigour in the analysis and a growth model that looks to the domestic market was given a cursory treatment and glossed over. Some thought that such a model refers to a closed economy which clearly was not the case. Despite the term intensification of globalization in Asia being clearly spelt out in the question, many candidates chose to look only at trade in goods only. Import, as an engine of growth (extract 8, para 1) was often mistaken for the import of consumption goods when the significance was that such intensification of globalization allowed for the import of inputs especially of raw material that could aid resource-scarce countries e.g Singapore in its growth. There were also many gaps in causal links. For example, in many of the answers, it was written that globalization resulted in volatility in a trade-reliant economy but this was not linked back to why looking to domestic market is thus a better model as it could help to absorb the external shocks and this was applicable to economies with large domestic market e.g China.

PJC Prelims 2010 CSQ1: Developments in the PC Industry