econsablaze_volume2

ECONSABLAZE VOLUME II | 2012

CURRENCY Who broke the Bank of

England? Find out on 4.

2 :: ECONSABLAZE

Published by the ECONS EXCO

(From left) Ling Xin Chuan,

Benjamin Toh, Ong Liang

Kun, Xue Quan, Wilson Kong,

Chow Wen Kang, Phang

Zheng Xun, Teoh Jie Shun,

Ang Jia Xi

ECONSABLAZE :: 3

Credits The completion of the magazine would not have been possible without the following

people:

Our teacher advisors, Ms Clara Lee and Ms Winnie Law, who went through

the numerous drafts to ensure the perfection of the magazine.

The various tutors from the Economics department for their help.

Seniors who granted us interviews

Friends who shared their opinions and experiences for the EU Trip

All Rights Reserved to the Economics Exco 2011/2012.

Comics on Page 9 and 15 are drawn by our talented artist Liang Kun. This issue is

designed by Jie Shun.

Images used in this publication are as cited below.

Image Credits

Cover Page: Kaptain Kobold – Flickr Creative Commons http://goo.gl/Y8x5h

Content Page: xcode - Flickr Creative Commons http://goo.gl/cBakX [H&M] / osiatynska –

Flickr Creative Commons http://goo.gl/Se2nx [remember to thank all the books you

haven’t read over the past three years] / Mukumbura - Flickr Creative Commons

http://goo.gl/TH3JS [Look after the pennies and the pounds will look after themselves]

Breaking the Bank of England: http://www.buzzle.com/img/articleImages/36130-14.jpg

4 :: ECONSABLAZE

Editor’s Note Paul Krugman famously remarked in his book, The

Accidental Theorist: and Other Dispatches from the Dismal

Science, that “nobody who has read a business magazine in

the last few years can be unaware that these days there

really are investors who not only move money in

anticipation of a currency crisis, but actually do their best to

trigger that crisis for fun and profit. These new actors on the

scene do not yet have a standard name; my proposed term is 'Soroi'.” This term is

especially pertinent when it comes to currency speculation in a country. The case of

George Soros is extremely fascinating- he made billions in investment profits during

a single banking crisis, leading to accusations from the public that Soros was solely

responsible for the crisis.

Going with the theme, this issue of Economics Ablaze will feature an article about

currency speculation written by Phang Zheng Xun (11S7D). Not only that, you will

also find a variety of articles that will stimulate your interest in economics, as well as

school events coverage to whet your appetite for Economics.

Also, be sure to read Wilson Kong (11S64)’s light and fun feature about the

economics of shopping, as well as Ling Xin Chuan (11S69)’s interesting feature about

the economics of higher education. Don’t forget to check out the interviews with

your seniors who will be going overseas for their undergraduate studies! They will

definitely prove to be interesting reads.

Happy Reading!

Chow Wen Kang

Chief Editor

On behalf of the Economics EXCO

OPINIONS

ECONSABLAZE :: 5

Opinions Find out your schoolmates’ take on our

big issue – Shopping.

I don’t shop. I think shopping is a

huge waste of time. Waste energy

and money. Makes me feel sad

because there when there is stuff I

like, I cannot buy because I do not

have money. – Tan Zher Yin, 11S6E

Shopping is good exercise and it's just

really fun to see all the pretty things

there are around but the stocks are

so limited!! A lot of common brands

like Zara, Topshop and Cotton On are

everywhere! Plus so overpriced! And

the stocks are quite repeated too

then you realise why Singaporeans

dress the same. LOL. – Jessie Zhang

Yeru, 11S75

I wish I could outsource my shopping

task. – Ang Jia Wei 11S7F

Shopping? It's ineffective allocation of

resources. It's a waste of time. I

mean, what's the difference between

a red and a yellow shirt if they have

the same design? – Chia Chingyee,

11S7D

I like shopping for clothes even

though I don’t buy most of the stuff I

try. I guess I don’t generate a lot of

demand for clothes… – Liow Wei Yuan,

11S69

I usually shop for clothes and shoes

at larger shops such as Cotton On. I

think they are luxury goods. I do it

during my free time [Habit]. If I have

more pocket money I will definitely

buy more. I prefer shopping at retail

outlets than online because I get to

try on clothes. I will not be sure of

the quality of goods if I shop online. –

Girl from 11S7H who wanted us to censor that she thinks shopping is a necessity.

I like shopping when I have money.

Shopping is good -- it stimulates the

economy. – Joshua Foo, 11S7D

I think everyone should go shopping

once in a while because this will help

in raising consumption for economic

growth. But we should not shop

excessively so that wastage of

resources is minimized. – Poh Yong

Keat 11S6G

OPINIONS

6 :: ECONSABLAZE

I think oligopoly and monopolistic

competition market structures are

quite common in Singapore. Shops

such as NTUC Supermarket operate

under an oligopolistic market

structure. But they got so little

variety. So boring. Cold Storage got

more variety. I like. We prefer to go

to the small shops at Bugis Street.

For girls, price is not the problem. But

more importantly, we must ensure

what we wear won’t be worn by

others. Thus we usually go Bugis

Street or Far East Plaza where there

is more variety. For example, even if

Checkered Shirts are popular, we still

want to wear different colour from

the rest. I think it is a good decision

for H&M, Uniqlo and other new

brands to set up their stores in

Singapore. If not girls can only go to

Forever 21, Far East Plaza. So boring

[Can be replaced by a 4 letter

Colloquial Singaporean English term

starting with the letter S]. A lot of

girls don’t like to shop in Singapore.

There is limited variety and not the

kind they want. Thus we shop online.

It is getting more and more popular

as it is convenient. It works under a

monopolistically competitive market

structure. Also, usually online shops

sell only 1 to 2 pieces per dress, so

you know it is unique. If others never

see what you’ve bought before, they

will ask you where you buy it from.

So there is satisfaction too. – from

11S7H who prefers to remain anonymous

I only shop when I need something.

Otherwise, no. – Dominic Cheong,

11S7F

I usually shop for ointments and

books which are necessities, as well

as sports attire. For ointments, I get

it every week because it runs out

quickly. For books, I buy them once a

month, and for sports attire, I buy

them once every 3 months. But if I

have more pocket money, I’ll spend on

other stuff. I think online shopping is

great and awesome as there are

more choices online. You can buy

things you’ll never buy outside as

people queuing behind you will see it,

but you can buy it online with

discretion. Unfortunately I do not

have a credit card. But there are

some limitations as well as there are

lots of pirated and fake goods online.

– Rolu Oyekanmi, 11S7H

OPINIONS

ECONSABLAZE :: 7

I usually shop for necessities at

different supermarkets such as

Carrefour and Sheng Siong and

would want to get goods at the

cheapest price. Sometimes you think

whether it is really worth going

around finding goods at the cheapest

price as there are opportunity costs

involved- wasting time to look around

plus the higher transport fares.

One interesting thing about shopping

is discounts. Sometimes I wonder

whether they are actually discounts.

Stores may mark up the prices of

their goods before offering a discount

at normal prices. Thus one may not

actually get a discount at all. Firms

are able to hide real marginal costs

of production and earn supernormal

profits as there isn’t any scenario

where we have perfect knowledge of

the costs of production involved or

the quality of the products. Also, even

if the goods are really cheaper, we

may be paying for something that

we do not actually need. That really

isn’t saving money at all. – Brandon

Tan, 11S7H

Too many options but too little

money to shop properly in Singapore.

– Kylie Liu, 11A15

I think shopping powers the economy.

I got no money thus although I have

the willingness, there is a lack of

ability. I prefer buying from big firms

as there is brand loyalty, strong

brand name and they got lots of

advertisement. Last year my parents’

income increased, so we purchase

more luxury goods such as sofa. –

Marcel Wong, 11S65

When shopping for clothes one must

first understand what and why he

likes a certain style, and then wear it

with pride and purpose in order to

achieve satisfaction for whatever he

spends on. – Solomon Poon, 11S79

Inflation rate is too high in Singapore.

Singaporeans turn to shopping

overseas and let the Chinese and

Indonesians propel our economy. –

Mao Shiyuan, 11S75

I like shopping for inferior goods! –

Oh Xin Hoon, 11S63

I hate shopping. It's a matter of

tastes and preferences. – Pang Si Hui

11S7F

Head to Page 16 for the article Shop Till

You Drop

FEATURED ARTICLE

8 :: ECONSABLAZE

Still Learning

By Ling Xin Chuan

Higher education does not come

cheap. With tuition fees easily going

into the tens of thousands, (not taking

into account the living costs that come

along with dormitory life), it can be

seen that higher education is rather

expensive.

Why then, do so many continue to

want it; and not simply “want” it, but in

many contexts (undeniably inclusive of

the local one) pursue it so ardently,

devoting significant amounts of their

time and effort to attain it?

This is because, with higher education,

comes a recognition of your academic

achievements or the acknowledgement

of attaining the necessary skillset in a

particular field. It increases

employability and hence, a potentially

higher degree of economic security, so

that your future is not all that

endangered. Hence, the opportunity

cost of not having higher education

seems to be rather substantial, as it

might block pathways for future career

advancement and compromise the

security of an individual’s future. But

with figures such as fees close to half a

million for studying abroad in the UK,

is it really that worthwhile an

investment?

There have been numerous stories of

college dropouts who have made it big.

The most publicized of which include

Bill Gates (founder of Microsoft and

the 2nd wealthiest person alive), Mark

Zuckerberg (CEO of Facebook) and the

late Steve Jobs (co-founder of Apple).

These men have all not completed

college and yet continued to set up

some of the world’s most successful

corporations and became some of the

world’s wealthiest people. In this case,

the opportunity cost of higher

education (or rather not having higher

education) becomes a three to six year

delay time obstructing people from

realizing their full potential. This is

most aptly put in Hayley Dunphy’s

words on popular sitcom, Modern

Family, as “If you had gone to college

you would have just done that 4 years

later. Or never.”

But one must realize that such stories

are the minority and not the norm.

Another way of looking at it is that

what higher education transcribes it

not necessarily limited to just a piece

of laminated paper that promises

higher employability or skill sets that

may or may not even be relevant in the

career of your choosing; higher

FEATURED ARTICLE

ECONSABLAZE :: 9

education also changes the individual

fundamentally and ultimately gives the

individual an opportunity to grow and

develop within its framework. This

allows the individual to open

himself/herself up to more

opportunities and broaden their

horizons. Many may argue that such

opportunities for individual growth

and development can be found

elsewhere, on your own,

notwithstanding higher education, and

this is indisputably true. However,

higher education is still a prodigious

gateway for that experience- more

accessible, plausible and meritocratic

than other gateways (such as the

radical notion of going on an endless

journey of self discovery around the

world).

What is presented in this article is but

a small agglomeration of different

ways of looking at higher education.

How higher education is ultimately

perceived is still dependent on the

individual. The opportunity cost of

having or not having higher education

is also relative to the individual. Be it

individual development, higher

employability or even an unnecessary

lag time, the investment that is higher

education is ultimately dependent on

the individual himself to decide

whether or not the said “investment”

was worthwhile, and whether or not it

was sufficient in reaping gains.

Read on to gain an insight on why our

seniors chose to further their education

in universities.

References

Dunphy, H. (Performer) (2011). Punkin chunkin

[Television series episode]. In Lloyd, C. (Executive

Producer), Modern Family . ABC.

The most successful college dropouts in history.

(2009). Retrieved from

http://www.retireat21.com/blog/the-most-

successful-college-dropouts-in-history

Articles from education,tuition fees, the guardian).

(2012). Retrieved from

http://www.guardian.co.uk/education/tuition-fees

FEATURED ARTICLE

10 :: ECONSABLAZE

Nettie Choo Studying Law at University of Oxford

What was the greatest motivation behind

your decision to choose the university of

your choice?

Since I was set on pursuing a

professional degree (law), my options

were naturally narrowed down to

either local universities or the UK. A

myriad of factors contributed to my

eventual decision – location, future

prospects, reputation – but in the end

I think reputation played the largest

role. Oxford is one of the best

universities in the world to read law.

I also like the philosophical slant

unique to its Jurisprudence course.

Why did you choose the overseas option

over the local option?

I guess it would be a lie to say that

reputation does not feature strongly

in this. Both international and local

firms value Oxford law students

highly.

I also really wanted the overseas

experience. Last December, I had the

opportunity to visit the university

and I fell in love with the place. The

beautiful school compound – uniquely

English architecture and amazing

parks – also became a huge pull-

factor in the end.

Lastly, I think I also wanted a change

of environment. Going overseas will

not be easy but I am simultaneously

excited and nervous for what is to

come. I trust that it will be a

challenging and fruitful experience.

What would you think would be your

greatest challenge while you are in an

overseas environment?

It would have to be living on my own,

definitely. I am also very reluctant to

leave my friends and family behind,

even if it is only for a few years.

Any advice to juniors regarding the

decision making process?

I think it is most important to make

a decision that is truly yours. A lot of

the time, pragmatic considerations or

the viewpoints of others might seem

to resonate strongly but at the end

of the day, you will be the one who

suffers (or benefits) from the

decision. Financial considerations

aside, it is your education and thus

your choice to make.

FEATURED ARTICLE

ECONSABLAZE :: 11

It might also be wise to decide early.

Working towards a specific, tangible

goal helps significantly in your

application.

Amaris Lim Shu Min Studying Medicine at NUS



your choice?

NUS is currently the only university

in Singapore offering the medical

course, and I really wanted to study

medicine, so I chose NUS over NTU

and SMU :)

Why did you choose the local option

over the overseas option?

There is no scholarship for students

who want to study medicine, and an

overseas education for medicine in

UK or Australia would cost about

500K. Medicine in USA is only offered

as a post-grad course so it isn’t really

an option. Although universities in UK

are said to offer a better education in

medicine, I think it's really a lot more

expensive than studying medicine in

Singapore (about 100+K) so I did not

think that it was worth the money.

Going overseas to study also means

giving up the comforts of life in

Singapore, and it means not seeing

your friends and family for a long

time too!




I think having to be independent is

one of the hardest things about

studying overseas. We have to really

learn to take care of ourselves

because we don’t have our family

there to look out for us. We also

have to learn to adapt to a whole

new environment, and learn how to

adapt to new cultures and new ways

of life, which may be daunting

initially. Studying abroad will also

mean that we have to cope with

different styles of learning, because

schools overseas may use different

methods of teaching that we may

not be used to.



Just apply overseas when you have

the chance! The application process

will allow you to gain experience and

help you greatly when you apply to

local universities! Especially if you're

applying to Medicine, attending

interviews by the UK university will

give you more confidence and help

FEATURED ARTICLE

12 :: ECONSABLAZE

you learn more for the NUS

interviews :) A place in an overseas

university is a very good back-up,

even if you are applying to local

universities. Ultimately, you just have

to weigh the pros and cons and

consider what's important to you! :)

All the best!

Ng Li Ki Studying Philosophy, Politics and

Economics (PPE) at University of

Oxford



your choice?

Being a debater, ideas fascinate me.

The crossroads between philosophy,

politics and ethics lies where my

academic interests are. The course

melds the quantitative rigour of

economics and logic (within

philosophy) with the qualitative

reasoning of other course options.

This I feel is a rounded development

of the mind, without compromising

depth or rigour. Oxford is the

birthplace of the course, and is

distinguished by its adoption of the

tutorial system - whereby your work

is critiqued in front of you by experts

in the field. This mode of learning, I

feel, promotes genuine understanding

of the material through your

personal lens.

Also, an education in the UK is only 3

years long, leaving the option of a

Masters' fairly open.

Why did you choose the overseas option

over the local option?

For the challenge, in short. There are

few better opportunities to immerse

yourself in a foreign culture and

expand your horizons, as well as to

get a better assessment of your

limits as an individual. It's part of a

voyage of self-discovery, and choosing

adventure helps with that. 'Not all

that glitters is gold, not all who

wander are lost' - studying overseas

isn't quite wandering, but I do feel it'll

help me find my bearing better.




Geographical distance and its

attendant problems would be the

greatest challenge. Much as

technologies like Whatsapp and

Skype have become increasingly

prevalent, there is no substitute for

regular meet-ups and physical

proximity. The support networks that

I've grown to become comfortable

FEATURED ARTICLE

ECONSABLAZE :: 13

with will no longer be as robust or

relevant to me. This would entail

having to grow out of my comfort

zone.



Consider more than just the opinions

of your direct seniors, or people who

are immediately convenient to talk to.

Make an effort to speak to seniors

who're already attending the

universities you're looking at, or those

who have graduated. Enrich your

perspectives before making a

commitment. Spend time researching

your options, and discuss them with

your friends. Often they will have a

very good idea of what suits your

personality, or what would be good

for you.

THE COVER STORY

14 :: ECONSABLAZE

Breaking the Bank of

England By Phang Zheng Xun

Suppose 1 British pound (GBP) = 3

Singapore dollars (SGD). You believe

that SGD will appreciate, so you sell

GBP 100 to buy SGD 300.

Months later, the exchange rate

becomes GBP 1 = SGD 2. Now you sell

the SGD 300 you own to buy GBP 150.

Since you started with GBP 100, your

profit is GBP 50.

However, if SGD depreciates e.g. GBP 1

= SGD 5, then the SGD 300 you own

can only buy GBP 60. This implies a

loss of GBP 40.

Furthermore, currency speculators

usually do not own that GBP 100 to

begin with, and they need much more

than that to make a meaningful profit

from small changes in currency values.

Hence, they often use what is called

"leverage".

For example, one may borrow GBP

100,000 by putting up USD 5000 as

collateral. If losses from speculation

become comparable to the value of

the collateral (USD 5000), then he must

either offer more collateral or exit this

trade with losses.

Such leverage can magnify profits or

losses. In the scenario above, the

speculator could profit GBP 50,000 if

the SGD appreciates, by investing only

USD 5000. This percentage return is

larger than that of profiting GBP 50 by

investing GBP 100.

Nonetheless, if the SGD depreciates

then the speculator could have lost all

USD 5000 (or even more if he gave

more collateral instead of closing the

trade). This percentage loss is greater

than that of losing GBP 40 from a GBP

100 investment.

Who broke the Bank of

England?

George Soros is a currency speculator,

known for "breaking the Bank of

England". He short sold £10 billion and

profited about £1 billion when the

pound devalued on 16 Sept 1992. How

did that happen?

The European Exchange Rate

Mechanism (ERM) was a system to

THE COVER STORY

ECONSABLAZE :: 15

minimise exchange rate fluctuations in

Europe. Member countries agree to

peg their currencies to the deutsche

mark (DM). This stability sets the stage

for introduction of a common currency;

the euro. In 1990, Britain entered the

ERM at 1 GBP = 2.95 DM.

At that time, Germany faced high

demand-pull inflation after the

reunification of East and West

Germany. Bundesbank (German central

bank) kept interest rates high to

mitigate inflation. Foreigners were

induced to deposit funds in Germany

to earn higher interest, thus raising

demand for DM and causing it to

appreciate.

All member nations of ERM then have

to raise interest rates to prevent their

currency from depreciating against the

DM. However, the Bank of England

faced a dilemma as Britain had a

recession in the early 1990s, so they

needed to lower interest rates.

In 1992, currency speculators like

George Soros believed that Britain

could not remain in the ERM for long.

If Britain leaves the ERM to employ an

expansionary monetary policy, then

GBP will depreciate. In expectation of

this, speculators started selling GBP

massively.

To support the GBP, the Bank of

England had to buy as much GBP as

possible with its foreign currency

reserves. Britain later realised that this

was unsustainable and left the ERM on

16 Sept 1992, causing GBP to crash.

The Bank of England lost £3.4 billion

from its attempt to defend the GBP.

Britain does not use the euro today

since it exited the ERM.

References

Upton, M. (24 Sep 2009). A brief history of Black

Wednesday. The Open University. Retrieved from

http://www.open.edu/openlearn/tags/black-

wednesday

THE BIG STORY

16 :: ECONSABLAZE

Shop Till You Drop

By Kong Wilson

During the recent Great Singapore Sale

2012, many people would have taken a

short break to shop for some great

deals out there. With international

megastores like Uniqlo and H&M

hitting Singapore’s malls, shopping has

certainly become a favourite pastime

for most Singaporeans. The desire to

shop is able to defy common logics

and make people behave uncommonly,

yet, has anybody taken a step back and

wondered what are the economic

concepts involved in shopping?

Most of us share this common

experience, we start shopping with a

well-defined shopping list in mind, but

end up buying more than what’s on

that list. This seemingly natural habit

underlines a fundamental economic

cost – the confusion between need

and want. More often than not, we visit

shopping malls to stock up on

essentials, goods that we truly need.

However, once we are in malls seeing

the wide range of product on sale, our

minds get clouded and start mistaking

wants as needs. We then end up

regretting over an impulsive purchase

which is of no use to us. Thus, it’s not

uncommon to see people selling their

2nd hand clothes which have not been

worn even once online. The inability to

differentiate between needs and wants

causes us to spend unnecessarily,

which in turn translates into economic

cost.

After deciding on what to buy, the next

stop would definitely be the cashier.

During sale season in particular, there

will always be a long queue in front of

the cashier counter, and we just have

to wait for our turn. This queuing

process highlights another economic

cost involved in shopping. Pay close

attention to those queuing the next

time you visit a shopping mall. The

chance is, you will observe that most of

them are not doing anything

productive – staring blankly at the

cashier, complaining about the long

queue, or simply standing there not

doing anything. This considerable

amount of time spent on queuing can

be used more effectively to get more

things done. Thus, by choosing to join

in long queues, they are forgoing the

next best alternative way to spend this

time, which highlights the high

opportunity cost involved in the

process of shopping.

Despite all these economics costs,

shopping is still embraced by people

THE BIG STORY

ECONSABLAZE :: 17

around the world because it leads to a

more than proportional increase in

national income through increased

consumption. In an economy,

everybody is both a seller and a buyer.

An autonomous injection of consumer

spending will lead to an increase in the

income of the boutique owner for

instance, who will then be induced to

increase his consumption on other

goods, e.g. food, and this increase in

the income of the hawker will further

induce him to spend on other goods.

These rounds of spending and re-

spending will continue until the

withdrawal equals the initial injection.

This scenario exemplifies the concept

of multiplier effect.

Moreover, shopping enhances the

societal welfare because it allows

consumers to enjoy a greater variety of

goods and services. As Singaporeans

gradually become wealthier, they

demand wider choices and better

quality products, hence providing an

incentive for retailers to differentiate

their products. As a result, most retail

industries in Singapore operate in a

monopolistic competition, with many

small firms producing differentiated

products and their behaviours being

independent of each other. Take

boutiques for example, there is not

one boutique which dominates the

market and dictates our choice of

clothing. We have the flexibility to

shop around in countless boutiques to

look for that perfect piece which suits

our liking and expresses our

individuality. To most people, this is

then the greatest appeal of shopping.

Amazed that your favourite pastime

has so much economic concepts

concealed within? Economics is

present in every aspect of our lives, try

paying closer attention to all the daily

events happening around you, and you

will be shocked at the sheer amount of

economics behind them.

Read more about your schoolmates’ take

on shopping in our Opinions section at

Page 5!

EVENTS BAZAAR

18 :: ECONSABLAZE

Economics Mastermind

By Teoh Jie Shun

The 2012 edition of the Economics

Mastermind was held on the 2nd of

May 2012. The 4 teams (11S63, 6H, 7B

and 7D) previously topped the

Preliminary Round and battled all out

for the ultimate glory in the finals in

front of an enthusiastic audience.

Questions asked during the finals

evolved around topics such as current

economic issues, Financial Literacy and

the Economics Syllabus. Teams first

answered 10 grueling MCQ questions

during the buzzer round, where all 4

teams attained around the same

number of points. The second round

was a speed round consisting of five

metaphorical steps where the objective

of each team was to be the first to

reach the end of the 5 steps. A correct

answer will move the team up a step

while a wrong answer demoted the

team down one step. 11S7D rose to

the peak after winning this round. The

final round consisted of 24 questions,

each of varying difficulty and worth

different number of points. Teams

could also re-direct the question

chosen to other teams as part of their

strategy. If the team who is directed

the question answers it correctly, they

will earn double the number of points

the question is worth. In addition,

these points will be deducted from the

team who chose the question. 11S7D

was heavily targeted during this round

by other teams, but converted this

danger to their advantage. Ultimately,

there could only be one winner, and

11S7D walked away as champions.

More pictures on the next page.

Try out sample questions on Page 21.

Our Champions – 11S7D! (above) and 1st

Runner-Up (below)

EVENTS BAZAAR

ECONSABLAZE :: 19

EVENTS BAZAAR

20 :: ECONSABLAZE

10 Questions from the Economics Mastermind

Q1) A fall in the price of leather could be due to

A) The government imposing a

minimum price below the free market

price.

B) A rise in the demand for beef.

C) A fall in rental rates incurred by

leather manufacturing firms in the short

run

D) A rise in the quantity supplied of

leather

Q2) A common disadvantage of buying a house

is:

A) Few financial benefits

B) Limited mobility

C) Restrictions on decorating and having

pets

D) Conditions in the lease

Q3) Under monopolistic competition, long run

economic profits tend towards zero because of

A) Product differentiation

B) The lack of barriers to entry

C) Excess capacity

D) Inefficiency

Q4) Investments that may be difficult to convert

to cash quickly have a high _______ risk

A) Inflation

B) Economic

C) Income

D) Liquidity

Q5) Bankruptcy refers to the process of

A) Obtaining permission to be late with

credit payments

B) Obtaining assistance from a financial

planner

C) Using court action to reduce or

eliminate your debts

D) Using court action to have payments

owed deducted from your pay cheque

Q6) Which of the following assets is most

vulnerable to inflation risk?

A) Stock

B) Real estate

C) Currency

D) Commodity

Q7) The diagram below shows the demand and

supply curves for a good. The government

imposes a specific tax of $2 per unit. As a result,

equilibrium quantity drops to 800 units.

What is the after-tax revenue of producers?

A) 24,000

B) 38,400

C) 40,000

D) 48,400

Q8) An investor buys a stock with a high dividend.

Suddenly, it drops 15% a day. The portfolio

manager cannot find any apparent reason for the

sharp fall. The company’s reply states there is

nothing wrong with the market and no

company’s announcement pending. What risk is

this?

A) Interest risk

B) Price risk

C) Market risk

D) Company risk

Q9) At the start of the year, the Deutschmark-

Sterling exchange rate is DM 3.64: Pound 1.

During the year prices increase by 12% in the UK

and by 4% in Germany.

According to the Purchasing Power Parity theory,

what will be the Deutschmark-Sterling exchange

rate at the end of the year?

Q10) According to the purchasing power parity

theory differences in the interest rates in this

country compared with other countries causes

changes in the foreign exchange value of a

country’s currency. (True / False)

1.B, 2.B, 3.B, 4.D, 5.C, 6.C, 7.B, 8.B, 9. DM

3.38 : Pound 1, 10.False

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ECONSABLAZE :: 21

EU Trip 2012

By Benjamin Toh

On 20th May, 15 of us departed for a

trip to Central Europe that would take

us to Finland, Switzerland, France and

Germany. This trip came at a

particularly volatile time for Europe,

which is currently receiving much

global attention over its Eurozone

crisis. Our objectives for the trip were

cut out for us – to gather first-hand

experience and information into the

specific topic that each group of 3 had

to research into.

The first stop was Finland. It actually

served as a point of transit for our

flight from Singapore to Europe.

During our 10 hours in Helsinki, we

attended a talk by Finnair, the airline

that we had flown with, and learnt

more about its green efforts to cut

down on energy usage, yet meanwhile

still maintaining its high service

standards. We also learnt about

Finnair’s business model and its

ambitions to serve as the air transport

hub between Europe and Asia, taking

advantage of Helsinki’s convenient

location in Europe to make a transit

stop at. We then toured the city of

Helsinki and got a personal experience

of the city voted as the world’s most

liveable city.

After a short transit flight, we arrived at

Geneva, the French-speaking region of

Switzerland. We visited Geneve Finance

at the heart of Geneva’s Financial

Centre and listened to an informative

talk by its Managing Director about

the attractiveness of Swiss’s banks,

well-known for their high degree of

secrecy and security, as well as how the

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22 :: ECONSABLAZE

financial industry drives the economic

engine of Switzerland. Our speaker

also tackled questions asked by us,

such as the reasons for Switzerland’s

decision not to join the European

Union (the Swiss believe in upholding

their national sovereignty), as well as

adopt the Euro as the currency (the

Franc was a strong currency and there

was little reason to adopt the Euro, a

weaker one then). After the talk, we

had a short city tour of Geneva, which

gave much insight into a city with one

of the highest standards of living in the

world. We rounded off our trip in

Geneva with a visit to the Palais des

Nations, the Geneva branch of the

United Nations, which served as “the

arms of the United Nations” by

executing the UN’s charters. This is in

contradistinction to New York, the

official headquarters of the UN, which

served as “the brain” as aptly put by

our tour guide.

On our bus ride to Zurich, the German-

speaking region of Switzerland, we had

a short school visit to

Aiglon College, an

international boarding

school located at the

foot of the Alps. The

school hosts students

from all over the world

and is a true epitome of

globalization. The fact

that no nationality

dominates the student

population, mentioned by our guide, is

more than sufficient proof of that. We

got an insight into the differences

between the way the school curriculum

is conducted in Aiglon and that in Hwa

Chong from the school trip. One thing

that made us green with envy was that

the students had the opportunity to ski

in the Alps as part of their PE

curriculum, obviously aided by the

close proximity of the beautiful

mountains. Zurich, as mentioned by

our speaker at Geneve Finance, was a

different form of financial centre from

Geneva as it mainly dealt with

reinsurance and related policies

compared to the private banking-

dominated industry in Geneva. We

visited the Zurich National Museum

and gained a better understanding

into the long and celebrated history of

the city of Zurich. That concluded our

time spent in Switzerland and off we

departed to Strasbourg, located along

the border of the Franco-German

border. Strasbourg was a relatively

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ECONSABLAZE :: 23

small town, and might not possess the

glamour and fame of Paris. Yet, it

remains as one of the most important

towns in France as it is the seat of the

European Parliament. Even so,

Strasbourg is relatively laidback, which

belies the importance of the town.

With that we ended our trip in France

and headed for Germany, the

economic superpower of Europe. We

visited the Mercedes museum, which

proudly showed off its long history of

innovation and huge collection of

classy cars that remain popular

amongst people. Next, we visited the

famous city of Munich. Our first stop

was the BMW Welt (German for World)

and BMW Museum, which showcased

BMW’s own tradition of technological

advancements and focus on the

production of high-end cars. The 2

museum visits gave much intimate

understanding into the highly

competitive car market in Germany,

dominated by premium local car

manufacturers such as Volkwagen,

Porsche, Audi, Mercedes and BMW

itself. We also visited the Munich City

Museum, which underscored Munich’s

long history. It also described Munich’s

contributions to the Nazi movement

under the Third Reich and also the

resistance efforts to the fascist regime.

It was unfortunate that our stay in

Munich coincided with public holidays

in Germany, although it was

fascinating to see its premium

shopping district, not dissimilar to that

of Singapore’s own Orchard Road, with

almost all its shops closed, just like

Chinese New Year in Singapore. As a

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24 :: ECONSABLAZE

result, our original plans were

dashed and we made a trip to

Allianz Arena, home to FC

Bayern Munich and the host of

the Champions League Final

several days earlier, instead.

The trip had greatly enhanced

our understanding of the

European Union and the

differences of the standards and

costs of living in the various

member countries. It had also

allowed us to better understand

the history and the long

traditions of the various cities we

had visited. The visit had also

fostered opportunities for us to

collect primary empirical data

and information with regards to

our areas of research. Lastly but

certainly not the least, we had

certainly made

new friends in a

new land and

bettered the

understanding of

current ones.

Read the diaries

of other

participants on

this page and the

next.

Europe's a beautiful place to visit – and when

you think about the crisis that has beset this

community, it is indeed saddening. When talking

to some of the locals, especially those in

Germany, you get a sense of discontent and

unhappiness towards the continued bailouts

that Germany has been sponsoring.

That, however, shouldn't take anything away

from the rich and diverse culture in Europe, nor

the experiences we had in climbing cathedrals or

appreciating the picturesque and rustic scenery.

One of the highlights of the trip was definitely

the visits to the two automobile museums:

Volkswagen and Mercedes-Benz. We learnt

about the many ways as to how both

companies attempted to assert their own form

of market dominance through the marketing of

different lifestyles.

My favourite part of the trip was when we got

to explore things by ourselves – by trying new

foods, or even planning our own trip to the

Allianz Arena when we realized that our plans

had to be cancelled due to the Public Holidays in

Europe.

-Chee Yuan Jun, 11S69

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ECONSABLAZE :: 25

In a nutshell, this trip was a whirlwind of excitement, adventure and learning. Touring 4

countries in a narrow span of 10days and attempting to glean as much as possible from that

brief stint in some of the most breathtaking places I had ever been to was a phenomenal

experience.

The entire experience in European countries was vastly different from what one would have

gleaned in Asian countries. In the shops, paper bags were widely adopted, plastic bags required

extra charge, the cashiers and service personnel were upbeat, jovial and friendly as we cleaned

their shelves of Haribo, chocolate and ice-cream. On the roads, bicycles could be seen having

free rein, trams weaved seamlessly across traffic on designated tram lines, congestion was

not an issue, and the vast majority of vehicles did not sport Japanese logos. Food was almost

always downed with light beers. (Which was a cheaper alternative to water!) Although prices

of food were relatively exorbitant, the Swiss chocolates/croissants, French pastries/cake,

German bratwurst/pork knuckle more than justified the prices. Nary could a skyscraper be

seen, but rather the sparse skyline was dotted with magnificent cathedrals that bespoke an

ancient and glorious past. At the top of these cathedrals (yes they let you climb them) the

unparalled view goes on for miles. In the French countryside, we woke up at 4am to watch the

sunrise and look at alpaca-esque animals. In the German suburbs, we practised dunking using

water bottles. The list goes on and on.

Of course, one does not simply go on an Economics trip without learning about the Europe

economy! We explored the Geneva Financial Centre, one of the world leading centres of

banking, automobile firms such as BMW and Mercedes Benz, both cornerstones of the

German economy. We also experienced firsthand the importance of innovation and creativity,

concepts very much reiterated in H2 syllabus.

This was an experience like no other, enriching yet inordinately exciting. “Croissant Croissant

Croissant”

-Eugene Lim, 11S77

This trip had certainly been an eye-opener.

Learning about the situation of the crisis from

news articles is one thing, and being physically

present in those countries directly involved in it is

yet another experience altogether. The finance

talks by the respective companies/institutions we

have visited, such as the Geneve Place Financiere,

allowed us to gain deeper insights into the

myriad of issues at hand, and provided us with

the perfect opportunity to find out more about

the respective organizations.

-Crystal Ong, 11A15

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Humanities Week 2012

30JULY-05AUG2012 By Ang Jia Xi

“Ladies and Gentlemen, this is your

captain speaking…”

Welcome aboard the annual Hwa

Chong Humanities Week, jointly by the

Hwa Chong Arts Department and the

Economics EXCO! This year’s

Humanities Week explored a variety of

issues surrounding the central theme

of Europe – from austerity measures in

the EU and PIGS (Portugal, Italy,

Greece, Spain), to the diverse History

and Geography of the area.

The week began with exhibitions in the

Inner Plaza about the EU, by our peers

who visited the region during the June

Holidays. Previously, these students

also conducted a presentation about

their various research projects during

the C2 Humanities Week Economics

lecture.

On Wednesday, the Economics

Odyssey brought fellow JC1 students

together in an intense and exciting

battle. Participants sailed through a

(quirkily) unique European-themed

journey involving pails of water,

creative expression, junk bonds,

telepathy and of course, Economics! It

was always particularly exciting to

watch when one had to answer the

question, “Spell ceteris paribus” during

a challenge. Despite heavy rain right

before the event, Odyssey 2012 still

managed to end off with a blast and

lots of fun.

We would like to thank the participants

of the various activities for their

enthusiastic participation, and hope

that this year’s Humanities Week has

been an enjoyable and enriching

experience for all. Beyond all the fun

and laughter, we also hope that the

activities will serve as a starting point

for your own journey of discovery into

the sometimes bizarre, but always

wonderful world of the humanities.

The calling of the humanities is to

make us truly human in the best

sense of the word. – J. Irwin Miller

More photos on the following pages.

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ECONSABLAZE :: 27

POSTCARDS FROM

EUROPE! ECONOMICS ODYSSEY 01 AUGUST 2012

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28 :: ECONSABLAZE

BLOCK TEST ANSWERS

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Block Test Answers

By our dear teachers and students

C1 Block Test 1 Good Sample Scripts 30 Answer Scheme 38 C2 Block Test 2 Good Sample Scripts 66 Answer Scheme 72

BLOCK TEST ANSWERS

30 :: ECONSABLAZE

C1 Block Test 1 – Good Sample Scripts Paper 1

b) (ii) Discuss the usefulness of demand elasticity concepts in explaining the strategies adopted by Apple to maximise its profit level. [8] Answer by Alethea Tan 12A14

Demand elasticity concepts allow firms to consider price, output and reactive strategies in order to maximize profits. Price Elasticity of Demand (PED), Income Elasticity of Demand (YED) and Cross Elasticity of Demand (CED) can be used to explain Apple’s profit maximizing strategies. PED is the degree of responsiveness of quantity demand of a product in response to a change in its own price, ceteris paribus. If PED>1, demand is price elastic and if PED<1, demand is price inelastic. The PED for Apple products can be considered to be price elastic, such that a change in price results in a more than proportionate change in quantity demanded. This is because there are many substitutes available with many other companies such as Microsoft and Blackberry producing similar devices. As such, Apple’s strategy to sell the iPad 2 at $100 cheaper can be explained by PED concepts as a decrease in price will lead to a more than proportionate change in quantity demanded leading to an overall increase in revenue. However, PED may not be relevant as Apple may only be cutting the price of the iPad in order to clear inventories at minimal loss. YED is the degree of responsiveness of demand for a good to a change in consumer income, ceteris paribus. The YED value for Apple products is >1 since it is a luxury good such that a change in consumer income will lead to a more than proportionate change in demand. This concept can be used to explain Apple’s launch of several new products consistently on a yearly basis, especially in 2011; which also saw 3.5% growth in the world’s real GDP growth, indicating an increase in consumer income. Apple’s decision to produce improved products could be seen as a response to the trend of increasing consumer income, where they increase output of luxury goods in order to create a more than proportionate change in demand, thus maximizing profits. More importantly, Apple’s launch of the iPad can be seen as a shift to the output of luxury goods, as an iPad is not seen as a necessity the way computers are. However, judging from the increasing affluence of consumers, the increased output of such goods is bound to increase profit. However, YED may not be relevant as Apple may have developed and produced the iPad in response to consumer tastes and preferences, with a desire for increased protability. Moreover, Apple could have been considering entering the tablet PC market anyway, regardless of consumer income changes, and its entry merely coincided with the steady increase in consumer income. Therefore, YED may not be that useful in explaining Apple’s strategies. CED can also explain Apple’s strategies if one assumes that competitors

Marker’s Comments: More evidence needed on Microsoft and Blackberry Link to total revenue

BLOCK TEST ANSWERS

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have slashed prices, since CED is the degree of responsiveness of demand to a change in price of another good, ceteris paribus. In order to differentiate themselves, Apple has developed iTunes and the App store which are “exclusively” for Apple users. This product differentiation could be explained by Apple’s need to increase CED value of its own products and competitors’ products such that the demand for Apple products will not be affected by decreases in competitors’ products. However, the iTunes and App store is a necessary complement to Apple products, and with a strong focus on consumers, Apple could merely be attempting to deliver a good service as opposed to reacting to rivals. In conclusion, it seems that while demand elasticity concepts are only useful to a limited extent in explaining Apple’s profit maximizing strategies as the company also considers many other factors. Moreover, the ceteris paribus condition does not always hold true and demand may be influenced by other factors such as change in consumer’s tastes and preferences. More importantly, total profits = total revenue – total costs. Demand elasticity concepts do not consider the costs side of the equation and thus may not be very useful in explaining Apple’s strategies to maximize profits.

Link to Fig 1

c) To what extent would China’s restrictions on exports of rare earth metals affect the American economy? [10] Answer by Xu Linfeng 12S7B

China’s restriction on exports of rare earth metals affect the American economy to a large extent. In this analysis, AD-AS model will be used to explained. AD= C+I+G+(X-M) An economy’s actual output is determined by the aggregate demand and aggregate supply of the economy, which refers to the sum of all the demand (supply, respectively) on the goods and services produced in various sectors of the economy. Economic growth include both actual growth (with increase in actual output) and potential growth (increase in productive capacity). With China’s restriction on exports of rare earth metals, it will shift the high manufacturing industries and investments away from America to China. This means the foreign direct investment (FDI) in USA will decrease as investors in order to gain more profits will shift to China due to lower cost of factor of production. Also, the business expectation for this sector of economy of USA will decrease and investment level decreases. Hence the “I” factor of AD decreases, causing leftward shift of AD curve. Also, with less exports of rare earth metal from China to USA, USA’s production of electronic devices will decrease. Hence its ability to export those finished products to overseas will decrease. As the cost of raw material increases, the final electronic products of USA will also have a increase in price leading the increase in its exported goods. Foreigners will import less US electronic goods as USA products are more expensives. Hence “X” factor decreases and since imports of rare earth metals are restricted, “M” factor increases, resulting in “X-M” decreases, hence a leftward shift of AD curve.

Marker’s Comments: Econs analysis of ↓AD? Secondary effect

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32 :: ECONSABLAZE

Also, since cost of production increases under the assumption that the price level of other goods in USA remains the same, the general price level might increase due to increase in price of electronic products. Since producers shift part of production cost to consumers, causing a upward shift of AS. Also, as there are less investment, the vertical range of AS stay the same since the productive capacity remains unchanged or even decrease. Hence the new equilibrium national income will be Y2, a decrease from original Y1. And USA economy may face negative growth in the short run. In the long run, since investment is reduced, the LRAS does not shift to right significantly. Hence the potential growth is also limited. However, electronic industries only represent part of USA’s entire economy, other sectors of its economy might be still as vibrant as before or even have great growth. Hence the economy of USA might not even slow down. Also, the price level of USA might decrease due to this trend, a good signal for price stability and low inflation. Besides, USA may able to find more domestic resources of rare earth metals and may not be as dependent on importing of those materials as now, hence, such a restriction in the long run may not have a significant effect on USA economy.

Why? Fig 1: US economy Spell out Real National Income Use evidence to support these! Overall conclusion?

Paper 2 - Question 1

The inflation rate in Singapore was recorded at 5.4% in April 2012. Subsequently, the Singapore government announced an additional spending of S$70 million aimed at helping companies transform their businesses to increase productivity. [25] Answer by Bernadette Lee 12S7B

In order to curb inflation in Singapore, which was 5.4% in April 2012, the government has increased its expenditure by S$70 million in order to boost productivity in businesses. This essay will explore how this boost has achieved the goal of curbing inflation and it thus has resulted in an improvement in the standard of living in Singapore. When the government increases its expenditure by S$70 million in order to help companies transform their businesses to increase productivity, as government expenditure is a component of aggregate demand, it will result in increased aggregate demand. However, by increasing the productivity of businesses in Singapore, the potential growth of the economy will increase, that is, the maximum output that can be attained

Marker’s Comments: Link to productive capacity

P1

P2

AD1

General Price Level

AS1

A1

AD2

P1

P2

RNI

BLOCK TEST ANSWERS

ECONSABLAZE :: 33

by the economy is now greater. This can be depicted in the diagram below: As seen in the diagram, initially, Singapore’s economy was producing near full capacity, which is Y1. As such, supply bottlenecks were present, and as the increase in aggregate demand was greater than the increase in real national output, as seen by the position of AD, near the vertical range of AS, demand-pull inflation occurred. However, firms could not increase real national output any further as the maximum real national output was reached, worsening the demand pull inflation and resulting in a 5.4% inflation rate. As such, by injecting S$70 million to improve the productive capacity of the economy, the vertical range of the AS curve would shift from AS1 to AS2. As firms could produced more output per unit of labour or capital, increasing productivity means that new technologies can be used in production or existing labour can go for skills upgrading courses or receive further education so they can perform their jobs more efficiently. As such, the vertical range of the AS curve will shift to the right and the upward sloping range would also shift in response to the increased productivity. As this shift is larger than the initial injection of governmental expenditure, it follows that the government will achieve its goal of curbing inflation. This is because AD2 now intersects AS2 at the bottom of the upward sloping range, thus indicating that the supply bottlenecks have been reduced. As such, the increase in general price level over a period of time will be reduced, thus curbing inflation. As the productive capacity of the economy has increased, it can be seen that real national income has also increased by a multiple from Y1 to Y2. This is due to the multiplier effect, where the increase in productivity has created spare capacity such that repeated rounds of expenditure, facilitated by the injection of S$70 million by the government, facilitates the increase in real national income by a multiple. The question is, will this increase in real national income, which is real GDP, brought about by the injection of governmental expenditure, improve the level of welfare of the

Use ruler to draw! Show on the diagram!

Y1 Y2

AS1 AS2

AD1 AD2

General Price

Level

Real National

Income

Fig.1: AD-AS Diagram for Singapore’s economy

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34 :: ECONSABLAZE

people living in Singapore. On the material side, this may be the case. Material standard of living refers to the quality and quantity of goods and services available to the average resident of a country to consume. As a key indicator of this is real GDP per capita, which indicates an increase in the material standard of living in a country, an increase in real GDP in a country such as Singapore, which has a low population growth rate, may result in an increase in real GDP per capita as it is likely that the real GDP growth rate surpasses the rate of growth of the population. As such, each resident of Singapore would have an increased material standard of living as a result of this measure. However, this may not be the case of the distribution and composition of the increase in real GDP is taken into account. As Singapore is a knowledge-based economy, with high emphasis placed on industries such as the biomedical industry, which employs high-skilled workers, the increase in real GDP may be distributed mainly amongst households, which work in such fields as the bulk of the injection will be used to develop the capital-intensive industries. Workers in labour-intensive industries may be left out, thus the increase in real GDP may not improve their material standard of living. In addition, as the bulk of the injection may have gone into increasing productivity in the capital goods industries, a significant component of the increase in real GDP may have been from the production of capital goods, which are not available to households for consumption. For example, refined oil and other petrochemicals may be of no use for households. As such, there will be little increase on the quantity of goods and services available for consumption. As such, the material standard of living may not necessarily improve. In addition, the non-material standard of living, or quality of life of residents, may not necessarily improve. To increase productivity of workers, they may have to divert their leisure time towards attending skills upgrading courses, thus reducing their time for rest and making them more tired. This reduces their non-material standard of living. Actually, the standard of living in Singapore may not necessarily improve immediately. As improving productivity takes time, such as the time taken to upgrade machinery or to train workers, it will take some time for the increase in real GDP to be felt. In fact, the real GDP may decrease during the upgrading process, as workers are involved in upgrading, thus they have less time to produce output. Old machinery may be decommissioned, further decreasing real GDP. Thus, in the short run, the material standard of living may fall so that upgrading can take place. As such, the material standard of living may not be improved in the short run. However, in the long run, it can be expected that the material standard of living in Singapore will improve. But real GDP is not enough.

Good link Yes! Good! Link to future vs current SOL ? Conclusion? Excellent!

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Paper 2 – Question 2

a) Explain the factors that will affect the extent of the contraction of an economy’s national income when net exports decline. [12] Answer by John Yap 12S7B

In a 4-sector economy, when net exports of the trade balance (represented by X-M) falls, aggregate demand and thus national income would fall by the multiplier effect. The magnitude of the decrease is represented by the multiplier k, and factors that affect this as well as other contributing components of the AD will be analyzed in this essay via AD-AS analysis. When there is an autonomous decrease in net exports, a component of AD, there is a corresponding decrease in income received by workers in the capital good industry. This would then reduce the income they spend on consumer goods by a magnitude dependent on the marginal propensity to consume. This then will decrease the income of households in the consumer goods industry, who will then too decrease their consumption spending on goods and services. This cycle will continue until the decrease in income is negligible, and by then, the national income has decreased by the multiplier k, which is equals to 1 / (1-MPC), or 1/ (MPW). Thus the factors that affect the magnitude of this decrease is the same as that which affects the MPW, which is equals to MPS + MPT + MPM, respectively the marginal propensity to save, of taxation and to import. The MPS is affected by the attitude towards thrift in the society. For instance, in an Asian society like Singapore or Japan, the MPS then tends to be higher. It is also affected by the presence of compulsory saving schemes, such as the Central Provident Fund in Singapore, and also prevailing interest rates, which represent the return of savings, of which an increased interest rates translates to an increased MPS. MPT is also affected by the progressivity of the tax system, as if the decrease in national income is not taxed as heavily, due to the MPT, the resultant multiplier would be lower. MPM is affected by a country’s attitude towards imports. In Singapore, the MPM tends to be quite high as we are an open, resource scarce economy, such that even our exports would require some degree of imports (such as refined oil). Thus, if the MPS, MPT, or MPM is high, the value of the multiplier would then tend to be lower, and the extent of contraction of national income is reduced. The decline in net exports in the preceding analysis is considered as autonomous in nature, which in reality, could affect other components of AD. If net exports decline due an increase in domestic consumption because of other factors, then the decrease in the magnitude of AD is not as large. The preceding analysis also assumes that the economy is below or at full employment equilibrium. When it actually might already be overheating such as in the Chinese economy. In this case, a decline in net exports might actually be welcomed and will contribute to a decrease in general price level without affecting national income significantly. The decline of net exports may also have more short term and long term effects, as if the decline consists of materials required to build infrastructure (e.g. sand and concrete), it may also be a signal of an overall

Marker’s Comments: At YF

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36 :: ECONSABLAZE

decrease in investment. This would affect the AD and further decrease it, but it would simultaneously decrease productive capacity and thus lead to further contraction of national income in the long run. In conclusion, when trade balance in the form of net exports worsens, national income contracts by the multiplier effect, and thus the extent to contraction is affected by the MPM, MPS and MPT, components of the multiplier. However, such a decrease may be mediated or even worsened if other components of AD assumed to be not affected changed or if the economy is above full employment equilibrium.

Good attempt!

b) Discuss whether a decline in national income necessarily meant that the standard of living for the average person in an economy has also declined. [13] Answer by Melissa Tay 12A14

Standard of living (SOL) refers to the average level of well-being that a citizen of a country has. It consists of two parts: material and non-material SOL. In this essay, I will first show how a decline of national income means that the SOL has decreased materially, then non-materially, and then how a decline of national income does not mean that the SOL has decreased. In this essay, national income refers to real GDP. Material SOL refers to the quality and quantity of goods available to a person for consumption. When national income declines, it means that the real output of the economy has declined, and less goods and services are available for consumption to maintain one’s SOL. As real GDP is being used here, it eliminates the possibility that national income has decreased due to a decrease in general price level without an actual decrease in output. Hence, materially, as there are less goods for consumption, the SOL has declined for an average person. However, a decline in national income does not necessarily mean that SOL has decreased materially either. It also depends on the population growth of the country. If national income has declined, and population has also seen negative growth, then an individual’s share of national income might still increase and SOL as well. For example, in 2009, Singapore had negative GDP growth. However, as there was low population growth rate, the real GDP per capita remained relatively unchanged. Hence, GDP per capita is necessary as well to determine if SOL has fallen. A decline in SOL also depends on the composition of the country’s national income. National income is the sum of the output of both capital and consumption goods, but only consumption goods affect the current SOL of a person. This means that a decline in national income might not lead to lower SOL, if the decline is due to lower output of capital goods. An example is US, which has seen lower GDP growth as its manufacturing industries move to China. However, citizen’s standard of living remains largely the same due to increased imports from China. Hence, the composition of national income is also necessary. The distribution of national income also needs to be considered in determining if a decrease in GDP lowers SOL. If national income is distributed inequitably, then some people could actually see an increase in

Marker’s Comments: Why? So? So? Link to SOL?

BLOCK TEST ANSWERS

ECONSABLAZE :: 37

income and therefore an increase in SOL, while others suffer the effects of a reduced income and have lower SOL. An indicator such as the Gini coefficient might be useful in this. National income also does not reveal anything about the non-material standard of living for residents. Non-material SOL refers to the quality of life of residents. If national income has declined, but quality of life improves, then there might not be lower SOL. For example, the number of negative externalities such as pollution might be reduced as a result of lower output in the economy. Hence, people’s health could improve and their SOL actually increases. A reduction in disamenities might also negate the effect of GDP on SOL (People could have more leisure hours), and SOL increases. In conclusion, a decline in national income might not necessarily mean that the SOL for an average person decreases. GDP is an inaccurate measurement of SOL, even with all the factors accounted for. Hence, indicators such as the Human Development Index, which measures real GDP per capita, average life expectancy and literacy rate may be more accurate in assessing SOL instead.

How come? But your chosen indicator was real GDP.

BLOCK TEST ANSWERS

38 :: ECONSABLAZE

C1 Block Test 1 – Answer Scheme [Paper 1] Main areas for improvement:

You need to master the skill of using case material as evidence to support underlying economic theory.

You are not to use contextual knowledge to answer the questions unless otherwise instructed.

You may use contextual knowledge when you see words such as ‘possible’, ‘likely’, ‘your own

knowledge’ in the questions posed. And even so, you must first exhaust all information given in the

case study before you use contextual knowledge.

Remember, for case studies, you play the role of the JUDGE, where you make your decisions and pass

your judgment based on the evidence presented to you (in the form of the extracts, tables, charts, and

other data).

Read the questions carefully to understand question requirements.

(a) (i) Compare the trend in the prices of the rare earth metals in Figure 1. [2]

Similarities:

Generally prices of all 3 rare earth metals rose (and sharply in 2011) Difference (any 1):

DIFFERENT LEVEL

Price of Terbium was the highest amongst the three rare earth metals

Price of Neodymium was the lowest amongst the three rare earth metals DIFFERENT RATE OF CHANGE Price of Terbium increases at the fastest rate amongst the three rare earth metals

One similarity and one difference must be identified.

Examiner’s comments

Objective of question: To test the basic principles used in identifying and comparing

trends.

The question asks for trend so it has to be of broader perspectives and not focus on

the ‘nitty gritty’. Learn to look at the big picture and consider the following:

Direction : All rising/increasing

Pace (slope) : Terbium rising at the fastest pace/rate

Magnitude/Level : Terbium highest price, neodymium lowest Also, learn to use comparative words.

BLOCK TEST ANSWERS

ECONSABLAZE :: 39

(ii) Suggest a reason for the difference observed in (a)(i). [2]

Reason for difference in LEVEL

Price of Neodymium was the lowest amongst the three rare earth metals

o Evidence: Ext 1 para 3, “Neodymium are more abundant and concentrated” o Explanation: So it is easier and thus cheaper to mine, hence higher supply of

neodymium. OR

Price of Terbium was the highest amongst the three rare earth metals

o Evidence: Ext 1 para 3, “Terbium is the rarest of the rare earth metals, and is getting less plentiful in world’s mining deposits and is harder to extract than the others”

o Explanation: Hence producers will incur higher cost of production, leading to lower supply of Terbium. Thus for any given demand of Terbium, its price will higher.

Reason for difference in RATE OF CHANGE

o Same evidence as above two. o Explanation: Due to limited spare capacity of Terbium, its supply is relatively

price inelastic compared to Neodymium which has more spare capacity. So for any given increase in price (due to increase in demand), price of Terbium will increase the most compared to the other rare earth metals.

NOTE: If the explanation for the difference doesn’t correspond to the difference

stated in (a)(i), no credit will be given, i.e. award 0m.


Objective of question: To test understanding that in a market, the relative scarcity of

supply will determine differences in prices.

Answer must be aligned to difference stated in a (i)

Most answers merely stated the evidence by pure lifting, without linking to the

relevant economic concepts of either supply or PES.

BLOCK TEST ANSWERS

40 :: ECONSABLAZE

(iii) With the aid of a diagram, account for the change in prices of the rare earth metals

in 2011.

[6]

Demand factor [1m]:

o Evidence: Ext 1 para 1, “Global appetite for rare earth metals has more than doubled over the past decade, as ever more devices make use of their unique properties”

o Explanation: Increase in derived demand for rare earth metals due to rise in the demand for final goods that comes about because of development of new products which requires rare earths.

Price inelastic supply of rare earth metals [1m]:

o Evidence: Ext 1 para 3, “new mines still take years to build”. o Explanation: This means that there is low or no immediate available spare

capacity, hence for any increase in price of rare earth metals (due to rightwards shift in demand), the quantity supplied will increase by less than proportionately, ceteris paribus.

Note: For any given change in demand, PES is relevant and should be explained in

conjunction with the former.

Supply factor [1m]:

o Evidence: Ext 1 para 2, “China’s reduction of exports by 40%” o Explanation Fall in market supply due to China’s reduction of exports would lead

to a fall in global supply of rare earth metals. Price inelastic demand for rare earth metals [1m]:

o Evidence: Ext 1 para 3: “There is no viable rare earth substitute.” o Explanation This means that consumers have no alternatives to turn to, hence

for any increase in price of rare earth metals (due to leftwards shift in supply), the quantity demanded will fall by less than proportionately, ceteris paribus.

Note: For any given change in demand, PED is relevant and should be explained in

conjunction with the former.

Diagram + reference [2m]: With reference to Fig 1, when supply of rare earth metals decrease from SS1 to SS2 and demand for rare earth metals increased from DD1 to DD2, this results in an increase in price of rare earth metals from P1 to P2. The price inelastic nature of demand and supply has led to sharp rise in the price of rare earth metals.

BLOCK TEST ANSWERS

ECONSABLAZE :: 41

Figure 1: Market for rare earth metals Deduct 1 m if not reference made to diagram Examiner’s comments

Objective of question: To test understanding of the use of demand, supply and

elasticity concepts to explain sharp price increases.

You need to learn how to STATE the occurrence, then identify the EVIDENCE and then

EXPLAIN the link between the evidence and relevant economic concepts (SEE). Mere

stating of evidence without explanation will warrant zero credit.

There were a handful of students who failed to read instructions properly and drew

three diagrams, one for each rare earth metal. The question asks for a diagram, not

diagrams!

In some cases, the single diagram drawn had 12 different lines - illustrating different

demand and supply curves for each of the rare earth metals mentioned and tried

shifting each one of them in their analysis. It is highly unlikely for examiners to want to

test something so complicated!

Some scripts used information from Extract 2 to support their answers for this

question. Now, this is incorrect as the date of Extract 2 is 2012, whilst the question

specifically asked for 2011. So, really, need to read the question carefully.

Quantity DD1

DD2 P1

P2

Q2 Q1

Price SS2

SS1

BLOCK TEST ANSWERS

42 :: ECONSABLAZE

(b) (i) Using relevant data, account for the difference between Apple’s revenue and profit

levels.

[2]

State the difference [1m]:

Fig 2: Revenue in general rises faster than profit, suggesting increasing cost of

production

Reason [1m]:

Ext 1 & Fig 1: Price of rare earth metals have increased over the years. This has

increased cost of production significantly for Apple. Since profit = total revenue –

total costs, with sharp increase in costs, profits hence increased at a slower rate.


Objective of question: To test understanding of the relationship between cost, revenue

and profitability.

It should be noted that both revenue and profit appear in Fig 2. So you should realize

that you have to make use of Fig 2 at some point in your answers.

Also, you should also take note that rare earth metals are used by Apple since Apple

produces ‘smartphones and tablet PCs’ which are mentioned in Ext 1 para 1. And from

Fig 1, price of rare earth metals are rising so that is the reason for the slower increase

in Apple’s profit.

However, you cannot really use Extract 2 to explain the increase in revenue as Extract

2 is for 2012 whilst Fig 1 has data till 2011.

BLOCK TEST ANSWERS

ECONSABLAZE :: 43

(ii) Discuss the usefulness of demand elasticity concepts in explaining the strategies

adopted by Apple to maximise its profit level.

[8]

Approach to the question:

1. Identify the strategies adopted by Apple 2. Thesis: Relevant demand elasticity concepts can be used to explain the strategies. This

means that not all demand elasticity concepts, so only choose the relevant ones. 3. Antithesis: Other reasons, apart from demand elasticity concepts, can be used to explain the

strategies. 4. Evaluation/Stand/Judgment: Limited extent, due to the fact that ceteris paribus is not held

in reality. Also, to maximise profit, cost considerations is necessary. Note the link from (b)(i).

Introduction

Relevant demand elasticity concepts will be examined to discuss whether and to what extent

strategies adopted by Apple will be effective in maximising its profit level. Demand elasticity

concepts are mainly used to maximise total revenue. To maximize profit, cost considerations are

necessary in the analysis.

Strategy: Lowering price for iPad 2 (Ext 2, para 3)

PED concept is useful in explaining Apple’s

pricing policy for iPad 2

PED concept is NOT useful

or less useful

PED is useful (definition & state application).

Ext 2: iPads have many global competitors so with more substitutes entering the market, it’s demand will be price elastic (PED > 1). So a fall in its own price would lead to a more than proportionate increase in quantity demanded, ceteris paribus. Total revenue for Apple will increase. Ceteris paribus, profit will also rise.

One should note that Apple lowered price of iPad 2 when they introduced the new iPad. This is perhaps a strategy to quickly sell away the old or soon-to-be obsolete stocks to make way for the new iPad.

With the new iPad, consumers switch away from iPad 2, leading to a fall in demand for iPad 2, hence its price will fall, ceteris paribus.

Evaluation:

The strategy may enable Apple to tap into another foreign market, where the new iPad has not been

launched yet, so that they can gain market share and then subsequently raise prices in the future to

increase their revenue.

BLOCK TEST ANSWERS

44 :: ECONSABLAZE

Strategy: Launch of new products (Tables 1 & 2)

YED concept is useful in explaining Apple’s

product launches

YED concept is NOT useful

or less useful

YED is useful (definition & state application).

iPhones and iPads are not likely to be inferior goods and can be considered up-market products with YED > 1 and using YED concepts, they should be launched when there is economic growth, since their demand will increase more than proportionately and hence raising Apple’s total revenue. Ceteris paribus, Apple’s profit will increase. By and large, Apple’s product launch has been consistent with this except for 2009. (Refer to Table 1)

Given that the iPhone’s YED > 1 as it is a more

luxurious phone than basic phone. The demand

for luxurious products would be expected to fall

more than proportionately when income fell

during recession in 2009 as seen in Table 1 and

the timing for introducing the iPhone 3GS would

seem to be wrong.

Evaluation:

However, for the launch of the iPhone 3GS, the ceteris paribus condition did not hold as the iPhone

3GS was deemed by consumers as a fashionable good and a gadget many were looking forward to

having it since it was first introduced in the US in 2007. Though income might be falling, consumer’s

taste and preference resulted in a high demand for iPhone.

Strategy: Product differentiation (Table 1):

Ext 2 para 4: can assume ‘growing competition’ to be price or non-price competition.

CED concept is useful in explaining Apple’s

product differentiation strategy

CED concept is NOT useful

or less useful

CED is useful (definition & state application).

Table 2: Apple keeps launching new and improved products as part of a product differentiation strategy. Assuming that this is a reaction strategy to rival’s pricing policy or pre-empting rival’s actions, and if successful, it may reduce the positive CED value (i.e. degree of substitutability) between Apple and its rivals. This means that it will be able to increase demand and hence total revenue. Ceteris paribus, profit will rise.

Since no info is given on rival’s pricing policy, CED may not be useful.

Such product differentiation strategies may not necessarily be a reaction to rival’s pricing policy but is used primarily to favourably influence the taste and preference of consumers and hence increase the demand for Apple products. Total revenue for Apple will increase. Hence, profit will also rise, assuming no change in costs.

BLOCK TEST ANSWERS

ECONSABLAZE :: 45

Ext 2, para 3: Given that the apps and music from iTunes and App Store are exclusive and cheap, and given that they are complements to the devices, this means the CED value is highly negative. This will increase demand of Apple devices and hence total revenue. Ceteris paribus, profit will rise.

Evaluation:

Whether Apple can eventually maximise revenue and hence profit from the product differentiation strategy will depend on how receptive consumers are to Apple’s products. The fact that Apple’s profits have increased rather exponentially since 2005 would suggest that their strategies have worked well relative to its rivals’ strategies.

Overall evaluation / Stand

Demand elasticity concepts can only explain Apple’s strategies to maximise profit to a limited extent.

Other factors can also explain their strategies.

From Fig 1, price of rare earth metals (raw material) was rising substantially in 2010 and 2011. Hence

costs of production for Apple would also have increased by a very large extent. Whether Apple can

eventually raise profit will depend on the extent of the increase in demand (ie total revenue) vs the

increase in cost of production.

Mark scheme

L3 L2 + reasoned overall judgment supported by sound economic analysis

L2

For an adequate and in-depth economic analysis of the effectiveness of any TWO of Apple’s

strategies with good and relevant references and application to the context. Use of relevant

elasticity concepts is evident.

Max Low L2 for an answer that has adequate scope but depth is lacking

Max Low L2 for an in-depth answer which is lop-sided (no anti-thesis)

Max Mid L2 for generic anti-thesis (eg. general statements on cost of production and ceteris paribus condition not realistic)

L1

For an answer that has identified the strategies but is descriptive or lacking in economic analysis

or analysis have major conceptual flaws.

BLOCK TEST ANSWERS

46 :: ECONSABLAZE


Objective of question: To test application of demand elasticity concepts to marketing strategies in

terms of the firm’s pricing and output decisions.

Note that for all elasticity concepts, one has to assume that there must be a trigger to elicit a

response. In other words, the key idea behind the concept is “responsiveness…to a stimulus”. It would

be meaningless to talk about “responsiveness” without a trigger or stimulus.

3 types of trigger / stimulus

PED is used to determine pricing policy (to increase total revenue). Trigger = change in Price. Evidence: Apple sold iPad 2 at $100 cheaper

YED is used to determine output decisions – whether to sell inferior or non-inferior high end goods. Trigger = change in income. Evidence: Table 2 product launches correspond to economic growth shown in Table 1.

CED is used to determine reaction strategies e.g. counter-marketing or joint marketing strategies. Trigger = change in prices of substitutes/complements. Evidence: iTune and App Store cheaper for Apple users. Either joint or counter-marketing strategy.

Note that the trigger/stimulus could be ‘actual’ (e.g. apple cut price of ipad by $100) or ‘potential’

(e.g. embarked on product differentiation to protect sales in case rival cut their prices).

Need to learn how to use evidence provided in the case to support explanation. Many scripts used

contextual knowledge to justify the PED of the iPad without using evidence. This resulted in incorrect

analysis.

The command word of ‘discuss’ requires a thesis / anti-thesis / evaluation structure, which

disappointingly many scripts failed to do so. Hence L1 marks were awarded as a result. Best answers

were able to elaborate on instances when Apples pricing and product differentiation policies had

NOTHING to do with the concepts of demand elasticity.

In addition, many scripts did not link to profit levels. Many simply stopped the analysis at total

revenue. Such scripts have not actually answered the questions fully and again marks are lost due to

careless reading of the question.

For evaluations, the usual ones were observed: ceteris paribus and cost considerations were ignored.

Most answers tend to be generic without specific reference to the case material. It should be noted

that (b)(ii) and (b)(i) are linked so the answers should rightfully link back to the rising price of rare

earth metals as increasing cost of production for Apple. And hence demand elasticity concepts alone

will not be sufficient to account for profit maximization.

For those who drew diagrams to illustrate the difference in total revenues, you need to make sure

Area B > Area A visually.

BLOCK TEST ANSWERS

ECONSABLAZE :: 47

(c) To what extent would China’s restrictions on exports of rare earth metals affect the

American economy?

[10]

Approach to the question:

1. Clarify that the answer will look into the effects of the action on America’s 4 macro-goals. 2. State the effect of China’s actions on the global supply of rare earth metals, which will raise price

of rare earth metals – answer from (a)(iii) 3. Thesis: Using AD-AS analysis, to explain impact on America’s 4 macro-goals 4. Antithesis / Evaluation: Explain the extent of the effects. 5. Overall judgment: Limited extent.

Introduction

Thesis: negative effects

Effects on AS

Ext 1: America is biggest importer of rare earth metals, which is an essential factor input for its

production of high-tech goods. So China’s exports restrictions will raise price of rare earth metals

and indirectly increases America’s cost of production. This will shift SRAS leftward, resulting in (cost-

push) inflation. As a secondary effect, inflation will reduce America’s export price competitiveness,

and its BOT may worsen, ceteris paribus BOP will also worsen.

Effects on AD

Ext 1: Given that demand for rare earth metals are price inelastic, an increase in its price will lead to

less than proportionate decrease in the quantity demanded, ceteris paribus. This means that

America’s expenditure on rare earth metal will increase. This is reflected as an increase in import

expenditure. Hence M falls, and BOT worsens. Ceteris paribus, BOP worsens.

Ext 3 para 1: Outflow of FDI from America to China represents a decline in investments.

Given that M increases and I falls, AD will also fall, via the multiplier, real national income will fall,

leading to slower or even negative economic growth. The unplanned increase in stocks will lead to

decrease in production levels and hence demand for labour will fall and (cyclical) unemployment will

increase.

Meanwhile, there could be a rise in unemployment as domestic workers working in the affected

high-tech manufacturing industries lose their jobs given the shift to China. This type of

unemployment is considered to be structural in nature since there is a permanent fall in demand for

such labour and they may not have the necessary skills to be employed in other sectors.

Moreover, the outflow of FDI from America will worsen the financial account and hence BOP

BLOCK TEST ANSWERS

48 :: ECONSABLAZE

In the long-run, due to the fall in investments, the LRAS will shift left, leading to a further contraction

in real national income and increase in unemployment.

Combined effect (use AD-AS diagram)

Fall in real national income (hampers economic growth) and rise in unemployment rates

GPL may rise or fall, depending on the extent of the shifts in AD and AS

Overall BOP may worsen due to worsening of current & financial accounts Anti-thesis: Consider extent of negative effects

AS may not fall by a large extent (Fig 3): America still has reserves and can actually buy from other nations, instead of solely relying on China even though China dominates the production. So the effect of cost-push inflation would not be too great. And hence export price competitiveness may not be affected.

AD may not fall by a large extent (Ext 3): Main engine of economic growth for America is durable-goods and services. So high-tech manufacturing will have little impact on the overall economic growth of America.

Overall judgement

In theory, the rare earth metals saga may inflict damage to the US economy as suggested in the

above analysis, but in reality, the impact would be minimal. Even if the threat is carried out, it will

largely be confined to the ‘manufacturing’ aspect of the high-tech sector in the US e.g. smartphones

– which ironically has been already largely been outsourced to low-cost off-shore centres in China.

Hence, China’s actions would likely result in adverse effects on the American economy but the

extent of these effects may not be very significant.

Mark scheme

L3

For an adequate and in-depth economic analysis using the AD-AS framework to discuss the effects

of China’s actions on America’s macroeconomic goals.

Max Low L3 if did not include effects on external goals of BOT or BOP

L2

For an average economic analysis using the AD-AS framework to discuss the effects of China’s

actions on America’s macroeconomic goals.

Max Mid L2 if did not make reference to case material Max Mid L2 if lop-sided analysis (no anti-thesis) Max Low L2 if lop-sided analysis (either AD or AS)

L1 For an answer that is descriptive or lacking in economic analysis or analysis have major conceptual

flaws.

E E2: Reasoned judgment supported by sound economic analysis E1: Unexplained judgment

BLOCK TEST ANSWERS

ECONSABLAZE :: 49


Objective of question: To use of AD/AS to analyse impact on the 4 basic macro-goals

Disappointingly, many scripts did not realise that this is a macroeconomics question. Many assumed

that since the first few parts of the question is on micro and so the last question should also be the

same. This shows that students don’t read the question carefully. The phrase ‘…affect the economy’

refers to the need to link to the macroeconomic goals. This has been clarified and reminded in

Tutorials 12 and the revision lecture.

Moreover, many students did not use Ext 3 and Fig 3 extensively, so a large part of the analysis is

incomplete since the written answers would not have an anti-thesis.

Some general observations:

(1) Need to learn to use the right set of tools ie AD/AS analysis and not Dd/Ss analysis (2) Focus on macro-goals should be broad enough to cover not just NI but to also include prices,

employment and trade balance. (3) Cost-push inflation and NOT demand-pull inflation is likely to be the immediate impact. (4) Do not over-blow the multiplier effect because the context is NOT pump-priming during a

recession. (5) Need to provide Anti-thesis (otherwise lop-sided analysis) as a counter-balance to the thesis.

Many of the impacts suggested in the thesis are basically “potential” or plausible rather than probable outcomes. Without an anti-thesis, the answer would appear too sweeping, simplistic and bias.

(6) Do not over-play the adverse long run effect on productive capacity caused by rare earth metals (7) Diagram issue… As a rule of thumb, it is best to use 2 diagrams to separate SR and LR analysis.

The LR impact, is likely to be a remote possibility.

(8) Best not to use such non-quantifiable words like small, large, great extent. Note, the command word “to what extent”… is not intended to elicit a quantifiable response from you. It is intended for you to provide a “balanced” analysis ie thesis and anti-thesis and come to a reasoned conclusion that balances different perspectives so that the overall analysis is neither too sweeping, simplistic nor biased.

BLOCK TEST ANSWERS

50 :: ECONSABLAZE

C1 Block Test 1 – Answer Scheme [Paper 2] 1 The inflation rate in Singapore was recorded at 5.4% in April 2012. Subsequently, the Singapore

government announced an additional spending of S$70 million aimed at helping companies

transform their businesses to increase productivity.

Discuss whether the above measure adopted by the Singapore government will

necessarily improve the standard of living in Singapore.

[25]


Majority of students chose this question over Q2. And a slight majority was able to understand the

requirements of the question. That is, they were able to see that there were essentially 2 segments to

the question:

(a) Analyse the impact of G spending on national income.

(b) Link the above to impact on SOL and discuss in the context of Singapore

The best answers were those that did not adopt a one-size-fit all generic approach. Instead their

approach was carefully and appropriately contexutalised to show their ability in applying the theory

to the context.

Mediocre answers tended to only focus on effects of AD due to government spending or effects of AS

due to the increase in productivity. Moreover, most scripts for the SOL segment were in the main very

generic without application to the given context.

Contextualising Segment (a)

Idea: Government spending to raise productivity: objective is to enable the economy to grow without

inflationary pressure ie achieve non-inflationary growth which in theory is the basis for achieving a

better SOL. Good scripts make use of this key idea to exemplify the impact on SOL. Thus, with non-

inflationary growth a country residents benefit from better SOL in terms of higher real incomes or

purchasing power. Note that the $70 million government spending is not pump-priming but rather

boosting the economy’s productive capacity.

Digressing

Some focused on the point that GDP must be measured in S$ (PPP) which has no relevance to time comparison.

Quite a number gave too much focus to the multiplier. The context is not pump-priming in times of a recession. Multiplier effects, if any are incidental rather than intentional.

BLOCK TEST ANSWERS

ECONSABLAZE :: 51

Contextualising Segment (b)

Some salient points to take note of:

Composition of NI: expenditure on investment in productivity growth is a non-consumption expenditure and hence does not directly increase production of consumption goods e.g. expenditure on better equipment or training of workers

Productivity increases should raise income of lower income workers and hence narrow the income gap.

Quality of Life: It was quite disconcerting to come across scripts that said raising productivity is likely to increase working hours, stress levels and pollution levels. This sounds like regurgitation and goes against the grain of raising productivity in the first place. The aim of raising productivity is to find ways and means of working SMARTER as opposed to HARDER ie produce more with less inputs (e.g. less hours of work) and using equipment and machines that are pollution free ( e.g. green technology). This is the acid test of good contextualisation.

Evaluation: If the use of the $70m is the result of diverting government funds away from social spending on health-care and education SOL would be adversely impacted, at least in the short term.

Approach to the question

1. Explain how the measure will eventually lead to increase national income using the AD-AS

framework

2. Explain why increase in national income will improve SOL

3. Explain limitations of using national income as a measure of overall SOL

4. Overall judgment

Introduction

The Singapore government injected $70 million into the economy with the aim of raising

productivity levels, (as well as to prevent soaring inflation). The issue of this essay is to discuss

whether and to what extent the above measure will improve the standard of living in Singapore. But

first, let us explain the effects of the measure using the AD-AS framework.

BLOCK TEST ANSWERS

52 :: ECONSABLAZE

Body

Explain how the measure will raise national income

Effects on AD:

Government spending of $70 million will increase G.

Since G is a component of AD, AD will rise and shift to the right (from AD1 to AD2).

Assuming there is spare capacity in the Singapore economy, an autonomous increase in aggregate expenditure will trigger a multiplier effect.

An increase in AD will lead to an unplanned decrease in inventory. Producers will increase output in the next period, and via the multiplier, there will be a greater increase in national income

Explain briefly the multiplier process (note that this is not focus of the question)

Effects on AS:

Since the aim is to raise productivity, it will have effect on the AS

In the short-run, with a rise in productivity, the unit cost of production will fall hence the SRAS shifts to the right.

In the long-run, this increase in productivity will also increase the productive capacity of the economy, hence the LRAS will also shift to the right (from AS1 to AS2)

Combined effect:

Fig 1: Effect of government measure to raise productivity

With reference to Fig 1,

Assuming increase in AD is in tandem with increase in AS, Singapore would experience non-

inflationary economic growth in the long run, with real national income increasing from Y1 to Y2 and

price levels remain stable.

Now that we have explained how the measure will raise national income, let us then discuss if this

increase in national income will necessarily lead to improvement in standard of living in Singapore.

Yf1

Real National Income

General Price Level

AS1 AS2

Yf2

AD1 AD2

Y2 Y1

P1

P0

BLOCK TEST ANSWERS

ECONSABLAZE :: 53

Standard of living (SOL) in Singapore is said to have risen when both the material and non-material

aspects of SOL have improved. It refers to the economic and social well-being of the people in a

country. It includes both the material and the non-material aspects of life. Material aspects include

the quantity and quality of the goods and services available for consumption while the non-material

aspects refers to the quality of the environment, leisure hours and level of stress for example.

Clarify how this essay will quantify national income – i.e. which economic indicator will be used to

measure national income. This essay will assume Real GDP growth as an indicator of SOL (mainly

for the material aspects)

Explain how increase in national income will lead to improvement in SOL

Commonly used indicator for material SOL for citizens – Real GDP

Define Real GDP

Higher Real GDP in an economy in recent years Citizens ought to be enjoying higher material living standards as more goods and services are made available for consumption

Given that the measure adopted by the government has led to a rise in national income in Singapore,

this implies that there is an increase in the physical quantity of goods and services available for

consumption, hence proving that material SOL has improved. This is based on the assumption that

the bulk of the physical quantity of goods and services are consumer goods of an equivalent or

improved quality. Since the nominal growth rate outweighs that of inflation rate, this may be an

indicator of a healthy economy with aggregate demand rising steadily.

The information provided indicates there is a rising SOL in terms of economic well-being of the

people in Singapore. But the information provided is still not the best measure of SOL as they fail to

give more details like the composition and distribution of the GDP to arrive at a conclusion that the

people are indeed better off and it also neglects the non-material aspects of SOL.

Explain how increase in national income may not necessarily lead to improvement in SOL

Real GDP per capita

In order to properly judge the material SOL of people in Singapore, we need data for real GDP per

capita. The real GDP per capita figures are obtained by dividing GDP by the population size. This is

because real GDP per capita figures account for changes in population size together with the size of

the economy. This means that even though real GDP has increased, the SOL in Singapore might be

lowered if the population growth is more than real GDP growth rate. However, it is may be unlikely

that population has grown by a large extent in a year for Singapore due to its low birth rate. So

Singapore’s SOL may not necessary improve or may at best improved marginally.

Evaluation: In addition, inflation rate of 5.4% may remain high, hence real purchasing power may be

eroded and the real national income may not increase very substantially. In this respect, the material

SOL would have been reduced in the short-run, if the effects of increased productivity are not felt by

Singapore.

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Distribution of NI

Even if real GDP per capita shows an increase, there may not be equitable distribution, we cannot

say then that the average Singaporean is better off when there is an increase in real GDP per capita.

If income disparity worsens as the economy experiences high growth rate, SOL does not improved

for all but only for certain groups of people.

In Singapore, income inequality has gotten especially serious in recent years even though we have

experienced strong economic growth. If the increase in national income (or economic growth) was

confined to a particular sector, for example financial services, then bankers and financiers may be

better off compared to the workers from other industries, which means that income inequality has

worsened. Given that Singapore’s twin pillars of growth are financial services and high-end

manufacturing sector, employees of these two industries may experience higher income than those

in other industries. We need Gini Coefficient data to learn more about the income inequality in

Singapore and to complement growth figures to reach more accurate conclusions regarding SOL of

the average Singaporean.

Evaluation: Indeed, Singapore Gini coefficient has been steadily rising over the past decade. This

suggests that the income gap has widened and not every Singaporean has benefitted from the

increase in national income. Moreover, if the $70 million were to aid the knowledge-based

industries or other SMEs, then not everyone will benefit from the measure and hence distribution of

national income would not be fair.

Composition of NI

Apart from its distribution, the composition of GDP is also important. GDP measures a country’s level

of production but may be a poor indicator of the consumption level by a country’s residents. This is

because a country’s output includes both consumption goods and investment goods but current

living standards depend only on consumption goods. Hence, for judging changes in consumer

welfare, it is important to consider the composition of GDP as well as its size. If the increase in

national income is due to expenditure on defence or capital goods, then we cannot say that

consumers are better off especially if these goods are produced at the expense of consumer goods,

then the SOL may not have improved. For example, if the Singaporean government built more office

buildings and thus resulting in a higher GDP figure, there is actually no change in SOL for

Singaporeans.

Evaluation: However, in the context of Singapore, it is unlikely that expenditure on defence and

investment goods is reduced in order to spend more on consumption goods since this will affect the

SOL of the population currently and in future. But having a large expenditure on defence and

investment goods does not necessarily mean that SOL has deteriorated because we need to consider

how large consumer goods are represented in GDP. If the proportion of consumer goods remains

high or even higher, then current SOL would have improved. Moreover, if the $70 million is for the

capital goods industry then current SOL may not have necessarily improved.

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Non-material aspects

The measurement of SOL should include the non-material aspect of life as well. But the information

given did not include that. GDP statistics includes only monetary transactions. Thus, if a non-

monetary activity becomes a monetary transaction, this will increase the NI figures without a

corresponding increase in welfare. In addition, if the growth was achieved through longer hours

worked and lesser leisure time, this does not indicate a higher SOL in Singapore.

Evaluation: However, in view of higher productivity, workers may actually work less hours and yet

produce the same amount of output. This would have raise the non-material SOL.

Conclusion

It is difficult to conclude that there is a rising SOL based on what the Singapore government has

adopted. The prediction of the effects can at best indicate a better SOL in material aspect,

alternative indicators such as Net Economic Welfare which adds to GNP certain items such as leisure

and housewives’ services and subtracts from GNP unmet costs of pollution and other disamenities of

modern urbanization and Human Development Index which includes the intangibles such as life

expectancy at age one, infant mortality rate and literacy rate have to be used to further assess the

standards of living of Singapore.

OR

In the context of the question, whilst it is not certain whether government spending on improving

productivity can immediately raise current SOL, there is however, a high probability that in the long

run, raising productivity, should contribute to a better future SOL, not only materially if it leads to

sustained non-inflationary economic growth, but especially if it gives the residents more time and

less stress to enjoy a better quality of life.

Level

Descriptors

Level 3

High L3

Low L3

Answer shows excellent understanding of the requirements of the question.

Able to use AD-AS analysis very well to explain the effects of the measure adopted by the Singapore government. [Alternatively, used the AE-Y plus PPC to show both SR and LR effects respectively]

For the SOL part, answer was able to show balance in terms of discussing material and non-material aspects.

Excellent rigour in economic analysis and development.

Excellent use of diagrams that is adequately explained.

Excellent attempts at contextualisation with a variety of relevant examples.

Answer good knowledge of AD-AS analysis; or AE-Y plus PPC.

Answer is balanced in consideration of material and non-material aspects of SOL.

Good rigour in economic analysis and development.

Good use of diagrams that is adequately explained (which includes diagrams with simultaneous shifts).

Some attempts at contextualisation with some relevant examples.

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Level 2

High L2

Low L2

Answer shows adequate knowledge of AD-AS analysis; or AE-Y plus PPC

Answer is balanced in consideration of material and non-material aspects of SOL.

Some rigour in economic analysis and development.

Relevant diagrams drawn but not well explained or clear explanation in absence of diagrammatical analysis.

Minimal or no contextualisation.

Max of High L2 (capped at 14m) if answer did not consider long-run effects of

the measure by Singapore government.

Answer shows some knowledge of AD-AS analysis; or AE-Y plus PPC

Answer lacks balance in consideration: only material or non-material aspects of SOL.

Lacks sound economic analysis and development


Max of Low L2 (capped at 10m) if answer is lop-sided – only discussed SR effects

of the measure and material aspects of SOL

Level 1

High L1

Low L1

Answer shows some basic knowledge of AD-AS analysis; or AE-Y or PPC.

Errors and inconsistencies occur in the explanation, showing lack of understanding of the economic concepts.


Answer is mostly irrelevant.

Only few valid points which do not clearly address the question.

E1 Mainly unexplained judgment.

E2 Judgment based on analysis.

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2 (a) Explain the factors that will affect the extent of the contraction of an economy’s

national income when net exports decline.

[12]

(b) Discuss whether a decline in national income necessarily meant that the standard

of living for the average person in an economy has also declined.

[13]


This is the less popular question and those who did this mainly fared worse than those who

attempted Q1.

Students should realize that despite being a part (a) – part (b) type of essay question, they must be

confident of the question requirements before attempting it. Not all 25m type of essay (like Q1) are

difficult.

Part (a)

Scope / Focus

Answers in the main were lop-sided and too narrow in scope. There was either too much focus on the

multiplier process, or too much focus on the changes in other components of AE e.g. government

spending, investment, etc. Many simply ignored the state of economy, whether the economy is

at/near full employment versus one that has a lot of spare capacity.

Part (b)

The skill of contextualising

Most answers to part (b) were awarded low L2 marks due to the lack of application to the context. A

lot of scripts can certainly gain better marks with better skills of contextualizing. For example: The

answer can could take the stand that sometimes an economic slowdown can make life better for

everyone ie gives a breather especially in terms of quality of life (intangibles). This is the reason why

sometimes Singaporeans find our pace of life too fast/stressful because of too much focus on

economic growth at the expense of quality of life.

Conceptual Issues:

Some seem to think that HDI is a BETTER indicator. If this is true, then it begs the question: Why use

real GDP per capita? Thus, it is best to say HDI is a supplementary indicator.

It is a fallacy to say that increased unemployment necessarily lower SOL. The basis for measuring SOL

is not unemployment but Real GDP per capita. It is possible for both unemployment and Real GDPper

capita to rise e.g. using more machines and less labour.

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Part (a)

Introduction

[Key Word(s) – Issue(s) – Approach (KIA) framework]

National income is the total value of final goods and services newly produced in a country within a

given period of time, usually a year. Net export is the difference between value of exports and the

value of imports of goods and services. A contraction of net exports will bring about a multiple fall in

national income due to the multiplier effect. This essay shall examine the factors that affect the size

of the multiplier which will then determine the extent of the fall in national income when net

exports declines.

Body

Generally, the extent of the contraction of an economy is dependent on three main factors – the size

of the multiplier, the size of the original change in aggregate expenditure and the overall state of the

economy.

FACTOR 1 – SIZE OF THE MULTIPLIER

State: A contraction in net exports works through the multiplier process and reduce national income.

Elaborate & Exemplify

o AE is total spending in the economy and comprises of consumer expenditure (C), investment expenditure (I), government expenditure (G) and net exports (X-M)

o Initial equilibrium national income is attained when national output is equal to aggregate expenditure

o Now with a reduction in net exports, a fall in AE occurs.

Decrease the level of AE leads to an unplanned increase in inventory. When AE < output (Y1<Ye), planned expenditure is smaller than planned output unplanned inventory

-AE

AE

Y1 Ye National Income

AE0

AE1

AE=Y

-NI = -AE*k

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accumulation and hence a ↑ in stocks producers will ↓ output in the next period, and via the reverse multiplier greater fall in NI than the original fall in both C.

The reverse multiplier effect is generated through k, the multiplier: -∆NI = -∆ AE * k. The amount of the net exports that has fallen will have an impact on the extent of the

reduction in national income as this fall is the ∆ AE.

Explanation of the reverse multiplier process:

With autonomous decreases in net exports, it will reduce income for households employed by firms

in the export industries.

The household will tend to reduce a proportion of the income on consumption, depending on their

marginal propensity to consume (MPC). This further reduces income for households employed in the

consumer goods industry who will further reduce their spending on consumption (induced

consumption).

This cycle of reduction in spending will continue until the fall in income becomes negligible. The

eventual fall in national income is several times the initial decrease in AE. The reverse multiplier, k,

represents the number of times the national income decreases with respect to the initial change in

AE.

Explain the components of the k value

The size of the multiplier depends on the extent of leakages from the circular flow of income. The multiplier process comes to a halt because not all income received during one period (i.e. rounds) is passed on in the next period, as there are leakages in the form of savings, taxes and imports. In a four sector economy, the multiplier, k, is given by k = 1/ (MPS + MPT + MPM) = 1/MPW

MPW measures the change in withdrawal from the circular flow as national income changes. It is the sum of MPS, MPT and MPM.

MPS measures the change in saving as income changes, MPT measures the changes in tax as income changes while MPM indicates the changes in import as income changes.

The higher the MPW, the smaller the proportion of income that is re-spent at each round.

Explain the determinants of MPS (any well-elaborated 1 point)

MPS is largely affected by

the attitude towards thrift in the society. This may vary country to country. In general, Asians tend to have a more prudent attitude, whereby it is a common practice to save for the next generation.

social security system in the country. If government encourages savings, MPS will be higher. In Singapore, there is a national saving scheme whereby all working individuals have to make compulsory monthly contributions to the Central Provident Fund (CPF). CPF savings ensures that individuals have sufficient savings for retirement as well as medical expenses. This compulsory aspect of savings, together with the prudent attitude, results in Singapore being one of the countries with the highest saving rates in the world.

The higher MPS represents a larger leakage from the circular flow at each stage and hence will

result in a smaller change in income given a change in AE

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Explain the determinants of MPT (any well-elaborated 1 point)

MPT is largely affected by

taxation policy of the country. A steeply progressive taxation system implies that MPT is larger at higher income level.

The extent of government benefits and transfer payments. A welfare state, e.g. the UK, usually have a higher level of MPT as the large amount of tax revenue has to be collected to finance the welfare benefits.

Given the higher leakages through taxation, the value of k will be smaller.

Explain the determinants of MPM (any well-elaborated 1 point)

MPM is largely affected by

Trade policies of the country – open-trade vs protectionism. A country which has high tariffs or quota on foreign goods will result in a lower MPM.

Openness of the economy. A country with high dependency on imports such as Singapore will have a high MPM. The lack of natural resources results in the dependency on imported raw materials for productions.

The high level of MPM will result in a small k value.

FACTOR 2 – SIZE OF THE ORIGINAL CHANGE IN AGGREGATE EXPENDITURE

The reverse multiplier effect is generated through k, the multiplier: -∆NI = -∆ AE * k. Hence, the amount of the net exports that has fallen will have an impact on the extent of the

reduction in national income as this fall is the ∆AE. Component of AE will also affect the overall ∆AE. But they have to be simultaneous change and

not resultant change due to the decline in net exports. FACTOR 3 – STATE OF THE ECONOMY

Another factor that will affect the decline in national income after a fall in net exports is the state of

economy. If the economy is operating at the inflationary gap, any reduction in net exports would

only reduce nominal national income and not real income.

Conclusion

To conclude, the extent of the fall in national income from a decrease in net exports depends largely

on the size of the multiplier, which depends on extent of the propensity of withdrawal through

savings, taxes and imports; the amount of net exports that has fallen; and the general state of the

economy.

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Knowledge, Understanding, Application and Analysis

L3

For an answer that has rigour in analysis, explaining in details the multiplier size and clearly

explains what happens when economy is at or near full capacity.

High L3 – good explanation of all THREE factors

Low L3 – including good explanation of only one other factor

L2

For an answer that gives a limited account of AE-Y model or uses the AD-AS analysis to

explain the multiplier. There is a general lack of rigour in economic analysis.

Low L2 for well-explained multiplier process and determinants of MPS, MPT and MPM

L1

For an answer that shows some superficial knowledge of net exports as an autonomous

expenditure or the consideration of the multiplier process, OR it is largely inaccurate with

conceptual errors.

Max High L1 for only multiplier process (without considering factors that could affect the size of the multiplier)

Introduction

[Key Word(s) – Issue(s) – Approach (KIA) framework]

Standard of living (SOL) in Singapore is said to have declined when both the material and non-material aspects of SOL have been worsened. The issue at hand is whether and to what extent a decline in national income necessarily meant that SOL for the average Singaporean has also fell. This essay shall examine some other factors that could affect SOL before coming to a conclusion.

Body

Clarify how this essay will quantify national income – i.e. which economic indicator will be used to

measure national income. This essay will assume Real GDP per capita growth as an indicator of

SOL (mainly for the material aspects)

Definition of Standard Of Living (SOL)

Involves the economic & social well-being of the people in a country. It includes both the material & non-material aspects of life. Material aspects - includes the quantity & quality of the goods & services available for

consumption Non-material aspects - quality of the environment, leisure hours & level of stress etc.

(b) Discuss whether a decline in national income necessarily meant that the standard

of living for the average person in an economy has also declined.

[13]

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THESIS – A decline in national income means that SOL has worsened

Commonly used indicator for material SOL for citizens – Real GDP per capita

Define Real GDP per capita

Real GDP is used because it measures the value of output at constant prices and any decrease must mean a fall in output and hence living standards. On the other hand, a fall in nominal GDP could be due mainly to decreases in prices with negligible fall in output and hence negligible worsening in living standards.

Changes in population need to be considered. If population decreases faster than the decrease in national income, then the real GDP per capita might have improved.

Lower Real GDP growth rates in an economy in recent years Citizens ought to be suffering from a lower material living standards as less goods and services are made available for consumption.

To have meaningful inter-temporal comparisons of SOL – One can use growth rates over time (5 years at least)

Exemplification / Evaluation / Judgment: Generally, in the context of a severe recessions, it means

real output is contracting and together with the possibility of a larger population growth due to a

positive birth rate and increase of permanent residents (negative growth rate + higher population

growth rate) NI per capita falls significantly the SOL indeed has fallen especially if there is

massive unemployment.

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ANTI-THESIS 1 – A decline in national income does not necessarily mean that citizens are better

off… (Materially)

However, a fall in NI does not conclusively mean that the quantitative aspect of SOL is lower

Need to discuss difficulties in inter-temporal comparison and propose refinements to the NI statistics:

Changes in Distribution of NI A country’s real GDP per capita may be lower over time, but its living standards may still be improving for certain sectors / segments of the population due to differences in income distribution.

If real GDP per capita but there is more equal distribution of income, SOL of the majority may not decline. For instance, a reduction in the income of the top 5% income earners > that of middle and low income earners Exemplification: E.g. during the recent financial recession, both the rich and poor are affected. Many

wealthy people suffered from paper loss in shares and stocks; white collar workers especially in the

financial sector are retrenched. Hence workers in these sectors will be earning less than other

workers in other non-affected industries such as teaching, helthcare or public transport services.

Evaluation/Judgment: However, during a massive recession, it is likely that the poor are still the ones hit worst given that they do not have much savings and may not possess the skills to find another job. And thus they will be unable to maintain a certain SOL as before. Hence, the Real GNP per capita might need to be augmented by the Gini coefficient as a basis for a more meaningful inter-temporal comparison of living standards.

Changes in Composition of NI National income measures a country’s level of income but may be a poor indicator of consumption

level by a country’s residents. This is because a country’s output includes both consumption

expenditure and investment spending but current SOL depends only on consumption spending.

Hence for judging changes in SOL, it is important to consider the composition of GDP and not just

the fall or increase in its size.

Exemplification / Evaluation / Judgment: For example, for small and open economies like Singapore,

which is an export-driven economy in which exports 2-3 times of our GDP. The fall in NI is highly

due to a in the exports such as petrol chemicals. This will not lead to a fall in the current living standards. However, firms are indeed badly hit in this global recession and many have resorted to retrenching staff and thus SOL will be adversely affected.

General difficulties in measuring NI (especially for developing countries)

In practice, the collection and processing of national income statistics is a complex operation. The

data is compiled from millions of different returns to the government. Inevitably, mistakes are made

– returns are inaccurate or simply not completed. For instance, income tax returns may be

understated and may also fail to include the lower income groups who do not pay income tax. In

developing countries where proper accounting systems are not in place, officials frequently lack the

expertise in data collection and where there are many inaccessible areas, the difficulties involved in

data collection are compounded.

Other considerations:

Size of monetized sector

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ANTI-THESIS 2 – A decline in national income does not inevitably mean that citizens are worse off

due to non-material aspects of SOL

Considering the material aspects of living standards are insufficient, we need to examine the non-

material aspects of living standard, such as Externalities and Disamenities.

Externalities

National income figures take no account of externalities produced by the economy. Many

production processes create harmful by-products, which harm the environment. Such external costs

are difficult to measure and are also not captured in the national income figures, which only reflect

private costs. For example, in Indonesia, if a forest is cut down, the value of the timber is counted in

national income but no account is taken of the loss of the benefits derived from the forests (e.g.

absorption of carbon dioxide). Thus, if decreases in output are accompanied by less in pollution then

the resultant fall in national income would actually improve the non-material aspects of the

economy.

Disamenities

When real GDP per capita falls and resulted in retrenchment, there may be more tension in the family. Crime rates may rise. Those who are still employed will be more stressful as they might have to double up their jobs and live in fear of being fired. However, if female workers who are dismissed and end up rendering more services to the families, it may even mean a happier family; also, people have more time for leisure which could be used to rebuild family bonds, pursue one’s own interests / hobbies or upgrade one’s skills. Evaluation/Judgment: However, this kind of so called more leisure time and family bonding is not ‘voluntary’ but due to unemployment and thus the stress level can be high.

Conclusion

It is difficult to conclude that there is a falling standard of living based on a large drop in national income statistics or real GDP per capita figures. However, in terms of material aspects of living standards, the average resident of a country might be worse off but similar conclusion is difficult to reach when we consider the non-material aspects of living standard.

Alternative indicators such as Net Economic Welfare (NEW) which adds to GNP certain items such as leisure & housewives’ services and subtracts from GNP unmet costs of pollution & other disamenities of modern urbanization and the Human Development Index (HDI) which includes the intangibles such as life expectancy at age one, infant mortality rate and literacy rate have to be used to further assess the standards of living of an economy.

Other possible evaluation points: A decline in national income due to a fall in net exports may have very adverse effects for small and open economies such as Singapore who are very trade-dependent (4 times GDP). For such economies, the decline in net exports is due to the fact that the whole world has plunged into a recession and they are not spared since it is expected the economy will shrink badly and unemployment rate is climbing. Hence, one can conclude that the standard of living for the average citizen of such economies would have indeed declined.

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Knowledge, Understanding, Application and Analysis

L3

Able to address all requirements of question with balance coverage of factors affecting

SOL.

Mid L3 if answers did not link to context of decline in net exports. For High L3, a balanced answer should discuss at least 3 key limitations with required

refinements to NI statistics (material SOL) and 1 aspect for measurement of Non-material SOL with examples

L2

Analysis lacking in depth: fail to provide economic analysis linking material and non-

material aspects of SOL.

Low L2 for largely accurate but “generic” theoretical answers with no examples

L1 Shows conceptually weak description of factors affecting SOL. Answer is descriptive with conceptual errors

Evaluation

E2 Insightful evaluative comments

E1 Limited evaluation without justification

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C2 Block Test 2 – Good Sample Scripts Question 1

d) Discuss whether government intervention in the luxury goods market is justified. [8] Answer by Koh Jia Ren 11S70

Governments only intervene in a market when there is market failure, in this case it is widening income gap and imperfect information. China has experienced an increasing income distribution gap, Gini coefficient rising from 0.457 in 2004 to 0.480 in 2009, which is very high. The Chinese government has intervened in the luxury market by imposing hefty consumption taxes on luxury goods. Thus, this reduces the physical standard of living difference between the rich and the poor because the rich consumes less luxury goods. However, I find that this is a poor way of reducing income inequality; taxing luxury goods does not increase the welfare of the poor in China at all. It’s only benefit is redistribution of income as the government taxes can be used for social programmes for the poor. The redistribution of income would be effective if China could effectively enclose the market so the luxury Chinese consumers have no alternatives. But extract 2 says Chinese shoppers simply go to Hong Kong and Europe to avoid the hefty tariffs. Thus, while demand for luxury goods is inelastic, demand for luxury goods in China might be elastic due to the availability of substitute retailers, including luxury brands’ increased online presence. Thus decrease in quantity is proportionally greater than increase in price after tax, luxury brands total revenue is reduced, reducing their after tax profits and shifting the Marginal Efficiency of Investment left, which might decrease investment in China. Thus, the efforts at redistribution of wealth brings more harm than good to China, and it should not intervene in the luxury market The UK through the QSA, intervened in the luxury market by banning a series of advertisements by Louis Vuitton (LV) which misled the public through advertising. This, perceived private benefit was actually higher than actual PMB, because the expensive leather bags were not fully handmade, which decreases their value. Thus, total private cost, area XYQEQP > total private benefit area YZQPQE, resulting in welfare consumption loss of area XYZ. Thus, the UK government was right to intervene to correct the market failure, bringing PMBperceived to equal PMBactual, to nullify the welfare loss.

Marker’s Comments: How does this happen?

QE QP

Qty of luxury goods

Cost/Benefit

PMC = SMC

PMBperceived

PMBactual

X

Y

Z

Welfare loss

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e) Discuss how firms in luxury goods retail market might compete with each other. [10] Answer by Chan Tuck Ging 11S6G

Luxury good firms operate in an oligopoly and not monopoly as there is increased competition [Extract 4 Para 2]. They can compete with price and non-price competition. There exist online discount luxury good sellers that carry time-limited offers for off-season luxury items at low prices. This means that the discount luxury good firms are practicing predatory pricing in an attempt to drive out rivals. Lower-end luxury firms have responded by venturing into discount outlets i.e. lowering their prices as well. This results in price wars. However, it is unlikely that oligopoly firms will sustain price wars as their overall revenue will be slashed severely unless one firm has significantly lower production costs than the rest. Thus it is unlikely for price wars to be their main mode of competition. This is possible when Hermes expanded its marketing with 32 new stores worldwide. They reap internal economies of scale when they expand to larger markets, resulting in lower unit costs. The other form of competition is non-price. Luxury firms build brand loyalty so as to make their product more price-inelastic. This is product promotion where luxury firms never lower their prices in discounts and sales, thus holding its band name’s value. Their marketing is also consistent, as well as production strategies. Majority of products are still made in home country [France] while shoes in Italy. Right celebrities are also contracted to endorse their brand, and store locations show their prestige. Hence, luxury firms can be said to engage in non-price competition by fostering brand loyalty. In conclusion, high-end luxury firms do not engage in price competition as it would nullify its brand name it has been building on since long time ago. Hence, they compete by making their product more and more unique. However, low-end luxury firms may resort to price wars as they reap economies of scale by expanding internationally, thus reducing cost of production.

Marker’s Comments: Evaluation

Question 2

b) (ii) In light of the data presented, comment on the likely impact of this change in value of the Euro described in a(i) on Greece’s Balance of Payments. [5] Answer by Lim Xin Tong 11S7B

The balance of payments in a summary statement of the monetary value of all economic transactions between the residents of a country and the rest of the world. It consists of the current account, the capital account and the financial account. Due to the depreciation in the Euro, Greece’s exports would be cheaper in terms of foreign currency and imports would be more expensive in terms of the Euro. Assuming the Marshall-Lerner condition holds, where the sum of the price elasticities of demand for exports and imports is more than one, the balance of trade will improve. This is evident by the current account figures in Table 3 that show an improving deficit from 2008 to 2011 as balance of trade improves.

Marker’s Comments:

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The depreciation of the Euro is also “hurting investors’ confidence”, as the value of their profits is likely to decrease given the continually depreciating Euro. The poor business confidence is resulting in a fall in foreign direct investment as seen from Table 3, which decreased from 1.3% of GDP to 0.1% of GDP. Overall, it is likely that the balance of payments will improve due to the improving balance of trade; especially since import expenditure will drastically decrease as well due to the loss in purchasing power. Nonetheless, it will not improve from a deficit to a surplus, as the deficit in trade balance is significantly large, coupled with the fall in investment.

c) (ii) Discuss whether the data provided will lead one to conclude that the current and future standard of living for Germany is higher than Greece. [8] Answer by Park Ji Yeon 11S7H

The data seems to suggest that Germans enjoy higher current standard of living (SOL) as compared to the Greeks due to 2 main reasons. Firstly, they enjoy lower unemployment rate. This means that more people have a steady source of income with which they can buy goods, such as basic necessities and consumption goods. Hence, their material SOL is higher than Greeks whose larger proportion do not have steady source of income. Furthermore, financial consumption expenditure of households in Germany is much higher than those of Greeks, and is almost tenfold. This suggests they enjoy purchasing more goods which can raise their material standard of living. However, it is still quite inconclusive as the data does not show consumption expenditure per capita, and hence it is difficult to accurately judge the standard of living of a person. Furthermore, as of years 2001-2011, Greeks enjoyed similarly long life expectancies and low infant mortality rates as those of Germans, and it can be inferred that they enjoy similar non-material standard of living. Nevertheless, additional information such as stress levels and pollution index would be needed to accurately conclude their current SOL, together with other indices such as Gross Domestic Happiness etc. The data also seems to suggest that the Germans will enjoy higher standard of living in the future due to higher gross fixed capital formation. As there is inflow of capitals in the forms of investment, production possibility curve will be shifted further outwards, more than the Greeks. Hence, in the future, this can be translated to higher consumption goods produced and consumed by the Germans and thus higher material SOL. However, whether they will truly enjoy the increase in SOL would depend on the economy’s decision to choose between production of capital or consumption goods. If it chooses to divert its resources to producing more capital goods without producing more consumption goods, the material SOL might not increase. In fact, if the Greeks decide to divert their resources in the future more towards production of consumption goods, they might actually enjoy from higher material SOL. Furthermore, the current economic growth in Germany may be due to increased production of goods that might result in pollution. This, in turn, might lead to lower non-material SOL in the future. Hence, data is not sufficient to firmly

Marker’s Comments: Link to health standards Why not current?

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conclude that Germany will enjoy higher current and future SOL, but it is likely to be so.

d) Discuss how the austerity measures will help alleviate the recession EU? [10] Answer by Lim Xin Tong 11S7B

The austerity measures include "cutting government spending by pay freeze for most public sector workers", "government ministries to reduce expenses and cutting minister's salaries". Assuming that those workers were over-paid previously, which is stated in Extract 5 as the "government spent massively" on "extremely generous pay and pension benefits", it is likely that these pay cuts will allow the unit cost of production to decrease as the cost of hiring workers decrease without harming productivity. This will cause SRAS to increase. The overarching aim of the austerity measures is to "demonstrate to investors it can manage its deficits to bring back confidence to the region", and show "political will to increase productivity".

With an increase in investment, AD₁ shifts to AD₂. Through the multiplier effect, the increase in national income is several times that of the original increase in investment. Furthermore, investment will allow LRAS to shift outwards, resulting in an increased national income level of Y₂. This multiplier effect is achieved by the increase in income of workers in the capital goods industry, who then spend a proportion of the increased income on consumption, thus increasing the income of those employed in the consumer goods industry. This cycle of spending and re-spending will repeat itself until total withdrawal equals to the injection. National income increases to full employment output and unemployment decreases, purchasing power increase and effects of the recession are alleviated. Nonetheless, such a scenario is only possible if investor's confidence is actually regained. The pay freezes have to be effective by not discouraging productivity, and the budget deficits need to be improved significantly or the country would have to pay fines levied by the European Commission, shown in Ext 6. In reality, this is extremely difficult as the government will face much opposition when "tearing up labour laws that make hiring and firing difficult". The government must keep the power of workers' union in check and not succumb to the demand for higher wages as this will harm productivity. Furthermore, even if the investments were to increase the AD is unlikely

Marker’s Comments: Explain why.

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to shift to a large extent and may even decrease due to the nature of the austerity measures that oppress consumption. For example, the increase in taxes will reduce the disposable income of consumers and reduce their ability to consumer. Government spending has also decreased and the C + G components of AD are adversely affected. Pay cuts and higher taxes may also reduce incentive to work, lowering productivity. In Paul Krugman's words in Ext 6, such measures "depress the economy further" and make it even harder to finance debts due to the reduction of tax receipts. As such, the austerity measures may in fact make it even harder to recover from the recession and reduce the level of national income. In conclusion. The government needs to ensure that its measures effectively boost confidence of investors without suppressing too much consumption. This can be done by not reducing spending on areas that will allow improvement in necessary infrastructure and constantly improving productivity regardless of the opposition from the ground. This can only be done through strong political will and calculated, careful spending so that national income will increase to alleviate effects of a recession.

More elaboration required Good attempt!

e) [H1 Paper] Discuss whether the austerity measures mentioned in Extract 5 will help alleviate the recession in EU. [8] Answer by Cai Anni 11S7B

Austerity measures are designed to cut government spending to reduce budget deficit so as to clear the EU countries’ debt in the long run. In principle, clearing the debt will make the financial situation more stable and attract back investors repelled by the unpredictability of eurozome economy. If this succeeds, FDI levels may increase, thus improving the financial account. Greece’s FDI has declined steadily and it is hoped that balancing its finances will attract investors and reverse the trend. Investment will also spur capital formation and potential growth. Therefore, FDI increase AD in short run and increases LRAS as well. However, as Krugman pointed out, austerity measures can actually depress the economy further. As government spending is a component of AD, slashing government budget will lead to a decrease in AD. As seen in Fig. 4, a fall in govt spending will shift AD towards the left,

Marker’s Comments: Good. Decrease in AD. Be

General

Price

Level

Real National

Income

AS

AD0

AD1

Y1 Y0 YF

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leading to a decrease in real national income. Cyclical unemployment will also increase as Y0 drops to Y1, furthering the gap from YF. In fact, growth in EU is a mere 0.2% due to the harsh austerity measures (Ex 5). The austerity measures, therefore, are actually dampening growth and causing more unemployment. Greece’s unemployment rate has already reached 17.1% and even Germany’s is 8.1%. Prolonged unemployment can cause workers to lose their skills decreasing their productive capacity in future. Instead of increasing taxes, which will reduce disposable income and further decrease consumption – which is steadily decreasing in both Greece and Germany – the government should instead consider lowering taxes to encourage domestic spending so as to increase AD and hence increase national income. AS Extract 5 mentions, for EU to cure the recession it must increase productivity. This can be done via skill upgrading schemes to retrain their structurally unemployed workers so as to improve potential growth by shifting the LRAS curve. They can also focus on research and development to find new comparative advantages to benefit from globalization. Greece has a persistent current account deficit which can be improved by upgrading its technology and producing more value-add goods thus improving export revenue. In conclusion, austerity is probably rather limited in effectiveness. While it can stabilize debt levels, more must be done to restructure economy and improve productivity or find new CA before Europe can benefit from increased investment and trade. Moreover, contractionary fiscal policy in a time of recession is unsuitable as it can prolong the recession. While the govt can probably reduce its spending on pay and pension (Ex 4), it can instead divert those to public construction projects to provide more jobs and income for its citizens. This, coupled with aggressive retraining schemes, will keep the economy afloat long enough for foreign investments to flow in on account of better labour productivity and is a preferable alternate to short term austerity measures.

more precise. Or fall in LRAS Good understanding of austerity package.

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C2 Block Test 2 – Model Answers Question 1 a) i) Compare the trend of total retail sales and e-commerce sales from 2002-2010. [2]

i) Both total retail sales and e-commerce sales increased over the period. However, e-commerce sales increased at a higher rate than total retail sales. OR However, while total retail sales fell in 2008 and 2009, e-commerce sales still increased

but at a lower rate compared to previous years.

Note:

1. Do not award marks for answer that compares “growth” instead of “sales”. 2. Do not award marks if candidate did not use comparative word e.g. On the other hand, however,

etc

Markers Comments:

1. Use of signpost words like “both” and “however” are missing in some scripts. 2. Similarity & difference are not apparent in some scripts where students describe the trend for

both variables without contrasting them clearly. 3. Lack of interpretation of data in some scripts – Students just describe the % change 4. Students answered in terms of “growth in sales” instead of the “sales” 5. Some students use year to year analysis instead of general and specific trend

ii) Explain one reason for the above difference. [2]

Evidence: Websites are doing ever more and cleverer things to serve and entertain their customers,

and are delivering price and product information quickly and securely (Ext 1).

Explanation: The increased satisfaction of the online shopping experience which caters to the taste

and preference of consumers led to increased demand for goods and services sold online compared

to traditional brick-and-mortar channels.

OR

Evidence: During recession in 2008-2009 when GDP growth was negative (Table 1), shopping and

flaunting newly bought goods could be considered insensitive hence consumers who still wished to

shop preferred to shop privately online rather than in brick-and-mortar shops.

Explanation: e-commerce is a close substitute for retail. Consumers who shun retail shops switch to

shopping in online shops instead, increasing the demand for e-commerce and falling demand for

retail.

Note: Pure lifting [1] + Link to analysis [1]

Markers Comments

1. Limited credit can be given for answer w/o use of economic concepts 2. Too much lifting from case study, multiple “quotes” without using analysis 3. Did not know the difference between absolute and relative change. Some students wrote there

is “decrease in the price of good sold via ecommerce” instead of understanding that ecommerce goods are just generally relatively cheaper than retail

4. Incorrect to just say that retail & e-commerce are substitutes of each other – this would imply that they will always have a negative relationship instead of just in 2008/9.

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b) Explain how the increasing presence of retailers online has benefited consumers. [2] The increased retailers online presented increased competition. The internet lowers transaction

costs (Ext 1) hence allowing goods and services sold online to be sold at lower prices. Consumers

would enjoy increased consumer surplus with lowered prices.

OR

The greater competition posed by the increasing presence of retailers online will allow consumers to

purchase a greater variety of goods and services which benefits consumers by increasing their

consumers’ welfare.

Note:

1 well-elaborated reason gets full 2 marks

Variety consumer surplus = 0 (misconception)

Variety consumer welfare = 2

Transaction cost consumer surplus = 1 (missing link of price)

Transaction cost price = 1 (need to make further link to consumer surplus)

Transaction cost Price consumer surplus = 2

Increase in competition due to increase in no. of sellers (inclusion of online retailers) lower price

consumer surplus

Markers Comments:

1. Concept error from scripts: Increasing no. of retailers online will allow them to enjoy internal EOS. Note that internal EOS is due to the firm’s own expansion.

2. Misconception: Increasing variety leads to higher consumer surplus 3. Many lifted from the source and did not explain using consumer surplus/welfare. 4. Too much lifting from case study, multiple “quotes” without using analysis

c) With reference to Extract 2, i) Distinguish the types of costs faced by a firm in the luxury goods industry. [2]

ii) With the aid of a diagram, explain how the profits of luxury goods makers are likely to

change with “rising costs”. [4]

i) A firm in the luxury good market faces fixed costs, which are cost of production that do not vary with the level of output, such as that spent on advertising and celebrity endorsement.

On the other hand, it faces variable costs which are cost of production that vary

positively with level of output. This includes wages paid to labor and raw material costs,

which increase when more labor and materials are required to produce more output.

Note: definition [1] + show understanding of concept [1]

Markers Comments:

1. Misconception: wages and raw materials costs are fixed costs 2. Misconception: fixed cost are cost which are unavoidable and variable cost are cost which

are avoidable. This is clearly incorrect. 3. Failure to clearly contrast fixed and variable cost using connecting words. Instead candidates

often simply listed the definitions. 4. Many students saw advertising cost and raw material cost as types of costs. Note you have

to know that the examiner is fishing for concept from you. Advertising and raw material cost are examples of fixed and variable cost.

5. There are a handful of students who came up with marketing cost/technical cost/etc….

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ii) Explain with revenue-cost diagram of price-setter, showing limited upward shift of MC, AC and fall in supernormal profits] [2]

- There have been increase variable costs but these represent only a small part of the cost base, and wages have not increased much hence the increase in cost is relatively small (Extract 3) [1] Note: Not sufficient to just mention that costs had risen as it is obviously given in the question

- Overall, luxury good maker still makes supernormal profits, enjoying “bumper years” but less supernormal profits than before [1] Note: Normal profits acceptable

- Note: Kinked demand curve can be accepted but MC must cut the vertical portion of the MR curve

Markers Comments:

1. Mistake to use DD-SS diagram for the market to show change in profits. It only shows the total expenditure for the entire market, not profits from the firm perspective.

2. Diagram errors: - MC did not cut minimum AC - AC1 and AC2 intersect - Cost increasing show as cost curves shifting towards the right - Did not include average cost curves, hence students will not be able to determine the profit level

d) Discuss whether government intervention in the luxury goods market is justified. [8] Inequity

Explain problem (why govt needs to intervene): The free market does not respond to the needs and wants of those without sufficient ability to pay for goods and services and there is a lack of distributive efficiency, as resources do not flow to those who have the greatest need for them.

How government intervenes: Government may impose tax on luxury good to raise revenue from the rich who most often purchase these goods and can afford to pay for them. This helps to distribute wealth from rich to the poor.

Evidence Evaluate

Consumption taxes have long been imposed on luxury items in China to lessen the income gap (Extract 2)

This may be particularly relevant in emerging economies with a growing income gap, and where growth in sales of luxury goods is surging (Extract 2). In China, the gini coefficient has been increasing (Table 2), indicating increasing income inequality.

However, the tax does not achieve its aim of raising taxes from the rich as rich Chinese shoppers can easily travel to HK or Europe to purchase the goods tax free (Extract 2). Hence, it is likely PED>PES. Luxury goods makers bear more of the burden and lay off workers, worsening the income distribution, as these workers tend to be from the lower income group.

Hence not justified since the solution does not

effectively reduce inequity

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Allocative Inefficiency due to Imperfect information

Explain problem (why govt needs to intervene): Misinformation through misleading advertising and insufficient information from online shopping leads to market failure, as PMBperceived> PMBactual leading to overconsumption [diagram required]

How government intervenes: How government intervention moves PMBperceived closer to PMBactual to achieve greater allocative efficiency

Evidence Evaluate

Online shoppers will not be able to see or try the goods before buying them (Extract 1), leading to possibility of suboptimal purchase decisions. Hence legislation involving e-commerce that calls for stricter government regulations may be necessary (Extract 1).

The luxury goods brand Louis Vuitton misled the public by suggesting its expensive leather bags were hand-made. (Extract 4)

Note: Any one of the above points are credited as

one source of government intervention

With an increased need for online presence of luxury retailers to reach out to the younger crowd and new luxury shoppers (Extract 3), there could be an increased incidence of imperfect information involving online shopping.

Luxury good makers and retailers often engage in advertising and creative branding hence misinformation in advertising could be a significant cause for concern.

Hence justified based on increasing prevalence of

the problem. Intervention via stricter regulations

would reduce allocative inefficiency in the luxury

goods market.

However, there is problem of government failure as it is difficult to enforce regulations on the internet realm.

At the same time, government intervention may not be necessary in the presence of independent industry regulators that monitor the truthfulness of the advertisements (Extract 4)

L1 Candidate did not manage to identify the relevant forms of government intervention in the

context, or merely described the forms of government intervention without economic

analysis, or rehash the theoretical analysis of imperfect info and inequity from lecture notes

without reference to case.

L2 Candidate made some reference to case with more detailed and accurate explanations for

government intervention. Candidate may not have explained satisfactorily if intervention is

justified.

L3 Candidate made good reference to case with excellent explanations on whether government

intervention is justified.

Note:

1 point well elaborated with evaluation = Max 4

2 points without any evaluation = Max 5

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Markers Comments

1. Quite a handful of students made no use of theory and gave a very layman description to the problem. E.g.: Inequity causes social problems hence government should intervene. Or, consumers are misled by the luxury goods producers and this is not fair, hence government should intervene.

2. Do note that the question ask if government intervention is justified i.e. what good reasons are there for the government to intervene in the market. There are quite a number of students who did not explain why intervention is justified, rather these students went into the discussion of the effectiveness of the intervention only.

3. A handful did not discuss and instead just explained the market failure. 4. Students often argued that consumption of luxury goods led to negative externality/demerit

goods. That is a far-fetched argument and most importantly the focus of the case was not on externality. It was clearly stated that it is income inequality.

5. Or students often argued that consumption of luxury goods led to income inequality, thus there was a need to reduce the consumption of luxury goods – which was NOT the aim of the consumption tax.

6. Many students argued that consumption tax reduces profits of luxury goods producers. Do not be confused with profit taxes. Profit taxes are imposed to reduce the profit of big firms.

7. Students use TARIFF analysis instead of consumption tax, just because there is a part that states “…shoppers swarmed to HK and Europe for products such as Rolex watches to avoid the hefty tariffs”. But that’s another scenario. What we can infer is that it is possible that consumers may also purchase goods from other countries to avoid CONSUMPTION tax. It’s quite appalling that they even drew tariff diagrams.

8. Students used Table 2 where gini coefficient for China is rising to argue that the consumption tax is ineffective in reducing the income inequality. This is not true. Table 2 only shows the gini coefficient up to 2009. Extract which talks about imposing the consumption tax is in 2012. Do be more sensitive to the details of the data given.

9. Some students argued that there should not be a ban of advertisements as it will reduce the profits of firms. This is similar to the mistake made in Timed Assignment 2. Why should the government place the firms’ profit level at top priority?

10. Some students also made the mistake of arguing that banning of advertisement should not take place as there is bigger welfare loss. Basically this group of students treated banning of advertisement as banning of the product.

11. Incorrect identification of deadweight loss area in diagram

12. Many actually concluded that since luxury goods is not public good or there is no externality hence government intervention is not justified!!! This shows that the candidate does not understand market failure. There are other sources of market failure other than public goods and externalities which can justify governments’ intervention.

13. Students did not use case materials to discuss justification for government intervention. Hence they use reasons such as market dominance which is not relevant in this case.

14. Also, this is not a macroeconomics question – governments do intervene to achieve microeconomic aims of equality & efficiency – do not link question to achievement of macro goals.

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e) Discuss how firms in luxury goods retail market might compete with each other. [10] Price Competition

Lower end luxury brands and online discount retailers may practice price competition through

offering discounts on off-season merchandise. This lowering of price is to increase the quantity

demanded for the good and thereby increasing the share of the market.

Elaborate Evidence

As off-season luxury goods are less fashionable, consumers may be more sensitive to changes in prices of these items. Hence as these goods may have PED>1, charging a cheaper price will lead to a more than proportional increase in quantity demanded of the good, hence total revenue will increase for the firm.

Within the luxury good market there are online discount retailers that have built their brand on price, such as online flash sales sites. They may compete more in terms of price.

Manufacturers such as Coach and Polo Ralph Lauren have a legacy of using discount outlets to liquidate excess goods without diluting brands.

EV: Possible that this discounting is not an attempt

to undercut competitor but pricing in response to

lower demand. Demand for these unfashionable

goods may have decreased compared to when it was

first introduced, hence accounting for the fall in

price. At the same time, demand for these goods are

also more price-elastic.

Non-price competition

Promotions and discounting can boost their financial performance of high-end luxury retailers,

especially in the short term. However, in the long run shrinking profit margins are a real concern (Ext

4) due to the mutual interdependence of luxury goods retailers in the market.

Hence the retailers tend to avoid price competition.

Elaborate Evidence

Luxury good retailers and makers lack the freedom to engage in price competition due to the need to maintain exclusivity and value of their goods.

Lifting: Discounting and promotions could lead to loss of prestige, especially amongst more traditional luxury shoppers (Extract 1). Explaining: This means that if the luxury good is

not seen as exclusive and prestigious by

consumers, they will not buy the brand causing

demand for the luxury good to fall.

Their tendency to engage in non-price competition to differentiate their goods through branding (lower PED) also allows them to charge higher prices than competitors, without suffering a greater than proportional fall in quantity demanded and hence total revenue does not fall.

Hence there is lack of incentive to undercut their rivals’ price.

Lifting: Luxury retailers have built brands on image and lifestyle that can withstand greater competitive pricing differences (Extract 1). Explaining: Due to the successful branding which

helps to differentiate the brand from its rivals,

the CED is lowered. Ie. Even if rivals lowers price,

demand for the brand will only be affected less

than proportionately.

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Instead, these firms tend to engage in non-price competition.

Elaborate Evidence

The firms increase demand for their goods through expanding into new territories (increase number of consumers), advertising (changing taste and preference of consumers) and providing premium services.

The firms differentiate their products through branding and advertising. They also establish brand loyalty through maintaining the quality of goods and image of the brand; this makes the demand for their goods price inelastic (ability to raise prices). Or, Low CED (ability to withstand rivals’ price

cuts)

The supernormal profits they earn enable them to engage in product development and advertising.

Factors which attract customers include a sense of belonging, ensuring the right celebrity is attached to the brand, being highly selective about where new stores are opened and providing a premium service (Extract 4)

French rival Herm s moved fast as markets changed. Its growth strategy included opening and renovating 32 stores worldwide and forging into new territories (Extract 4).

High profit margins of 55-75 percent

Extract 4 suggests that maintaining exclusivity and never going on sale is an important consideration

for attracting customers to buy luxury goods. Luxury good retailers, particularly the higher end

brands such as LV and Hermes predominantly engage in non-price competition although lower-end

luxury brands such as Coach and online discount retailers may engage in price competition.

Online discount retailers of luxury goods have the ability and incentive to carry out price competition

as they face lower fixed costs (they do not pay rental as they run online shop front rather than luxury

boutiques) and hence can provide deeper discounts.

Also, discount and lower end luxury retailers target different markets than high end luxury brands.

Higher end brands target the more traditional prestige conscious shoppers. On the other hand,

lower end brands target the more budget conscious luxury consumers who have a more price elastic

demand for luxury goods.

L3 Good, balanced analysis based on the case material and good use of economic analysis

L2 Explains the strategies of luxury good retailers using economics and with some references made to

the case material.

L1 Describes strategies of luxury good retailers in a general manner (no/minimal use of economics)

and with little reference to case material.

E1 Attempts to synthesise when there are conflicting views.

E2 Provide good synthesis and a reasoned conclusion.

e.g. Ability to point out that non-price competition is the predominant form of competition

amongst luxury retailers due to importance of maintaining prestige of brand, while price

competition is only used in targeting certain segments of the market which are more price

sensitive through sale of goods that have lower demand from past seasons.

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Markers Comments

1. Candidates were often able to identify clearly whether a strategy in the case extract was price or non-price competition. However, there was lack of concerted effort in many scripts to apply economic concepts and theory to rationalize those strategies. At the other extreme, some students were contented to regurgitate theory on oligopoly, even explaining predatory pricing and price wars, without regard for case evidence and whether the points were relevant to the issue.

2. Quite a handful stated that luxury goods market is monopolistic competitive because the goods are differentiated. This is not a good way to decide whether a market is monopolistic competitive because differentiated goods is not a distinguishing characteristic.

3. Many were confused with price competition and price discrimination. 4. Many still had problems with application of PED, CED and YED. Note: if you are analyzing how

much the price cut by rival firms affect demand for your good, you should be using CED (and not PED). If you are analyzing how the performance of the economy affects the demand for your good, you should be using YED (and not PED). So when do you use PED? - When you are deciding whether to cut/raise price (not as a reaction to other factors but your own decision).

Question 2 a(i) How does the value of the Euro in 2010 compare to its value in 2008? [1]

Euro depreciated against the USD over this period (1m)

Examiner’s report:

Many students used decrease/lower to describe depreciation which is incorrect terminology.

A few students gave the answer as devaluation. This shows lack of conceptual understanding of between depreciation vs devaluation.

The examiners accepted weakened; but it should be noted that for future answers about exchange rate, one should use appreciated / depreciated in one’s answer.

a(ii) With the use of an appropriate diagram, account for this change in the value of the Euro from 2008 to 2010. [3]

Explain one factor leading to depreciation of the Euro, explaining the impact on both the demand and supply of the Euro – diagram (1m)

Explanation Evidence

Demand for Euro: Speculators/ Investors’ confidence in the Euro is lowered. They hence anticipate a fall in the value of the Euro. As such, there will be a fall in demand for the Euro (1m)

Supply of Euro: Investor sell off their holdings of Euro, increasing the supply in the Forex Market.

Introduction: “...and is hurting investors’ confidence” Extract 5: “..as investors wonder if Greece’s fiscal crisis will spread... The Euro in the past six months has fallen by about 17% against the USD as investors rushed to ditch the currency.


Many students had problems with labeling of the axes.

For the y-axis, it should read Price of Euro in USD, and the x-axis should read Quantity of Euro.

In the analysis, students lost marks as they focus either on the demand OR the supply of Euro.

Full credit was awarded to students who were able to describe how BOTH a reduction in demand and increase in supply of Euro lead to the depreciation of the Euro.

A handful of students used what happened to Greece’s/Germany’s current account to account for the change in Euro. This is not the best figure to use as the demand and supply of Euro is affected by the demand for imports and exports of all the Euro countries not just Greece/Germany.

It is also important as a Case Study skill to link the factor affecting to Demand and Supply to the information given in the extract(s).

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b(i) Describe the trend of Greece’s inward FDI from rest of the world from 2008 to 2010 in Table 3. [1]

Inward FDI into Greece fell from 2008 to 2010. Examiner’s report:

Many students were able to answer this question.

In terms of presentation, it should be noted that exact values/ numbers are not required to secure the 1 m.

Students should note that if they decide to quote figures, they should cite correct figures/ period. This is because even if they gave the right trend but gave the wrong figures/ period, then no marks will be awarded.

Although majority of the students were able to score 1m for this question, a minority struggled with the statistics. It is insignificant to say that the FDI is positive. This is inward FDI not a net figure hence it is obvious that it must be a positive figure. Also a few students actually said that the Inward FDI increased!!

(ii) In light of the data presented, comment on the likely impact of this change in value of the Euro described in a(i) on Greece’s Balance of Payments. [5]

Introduction: Depreciation of the euro is supposed to have a positive impact on the BOP of Greece.

Table 3: Current account (2m) Table 3: Financial account (2m)

Depreciation will make Greece’s exports relatively cheaper in terms of USD, while at the same time makes imports more expensive in terms of the euro. If we assume Marshal Lerner condition hold, then this will result in an improvement in the Greece’s BOT position and its BOP will improve. Evidences: Table 3: From the figures on current account, we do see that there is an improvement in Greece current acct from 2008 – 2010 as the deficit in the current acct is improving

With the depreciation of the euro, there could be an inflow of FDI into Greece as it is cheaper to do business in Greece. Evidences: Table 3: However, if one examines the FDI inflows into Greece, we see that from 2008 to 2010, the inward FDI as percentage of GDP has been falling in Greece. This could be explained by the fact that even though it may be cheaper to invest in Greece, business optimism could be very low due to the on-going crisis that no new investment is flowing into Greece Extract 5: Few investors or businesses are brave enough to make long-term bets on the Greek economy in these conditions.

Note: Students are required to comment on the impact on the current and financial accounts that make up BOP. Conclusion : The depreciation of the euro should lead to an improvement in the BOP position. However, based on the data presented, it is unclear if the BOP position of Greece will improve as the data shows an improvement in current acct position but a worsening financial acct. (1m) OR (Alternatively, students may point out that given that financial acct covers more components than inward FDI into Greece, we are unable then to conclude if BOP position will improve due to incomplete picture/ data).


Many students were able to answer explain how depreciation leads to an improvement in the Balance of Payments.

There are a few points/ improvement that can be made to some of the answer(s)

There is a need to link theory to actual data; many students were able to explain how depreciation affected both the current and financial accounts under Balance of Payments in theory, however, they fail to link this to data to see if latter collaborate with this analysis.

In explaining the changes to exports and imports, there are still a handful of students that need to improve on their phrasing. They wrote that the price of exports is cheaper compared to foreign goods and the price of imports more expensive. This is not correct as the producers/ firms have not adjusted prices of exports/ imports.

The correct phrasing should be such that depreciation will result in the price of export being relatively cheaper in foreign currency (i.e. USD) and the price of imports is relatively more expensive in Euro.

Many students FAILED to understand that for a depreciation of the Euro, it is sufficient to simply explain the need for Marshal Lerner condition. It was incorrect to further attach the assumption that both price elasticity of exports and imports should be elastic. Do note that for ML condition to be satisfied it is possible that PEDx<1 and PEDm<1.

Many students also failed to understand that the data does not have enough information for us to conclude if the BOP will improve / worsen.

Other refinements to some answers are : “depreciation would result in an improvement in the current account” - more precisely, should be on Balance on Trade

“ export increase and import falls” – could mean quantity, should rephrase to export rev and import expenditure, not on the quantity

Student should learn to use the right terms to describe the BOP/ BOT position – worsen/ improve rather than increase/ decrease. In addition, there is no such word “deproving”

There are a handful of students that wrongly state that FDI is captured under capital or current account. It should be Financial account (as per HCI lecture notes)

BLOCK TEST ANSWERS

ECONSABLAZE :: 83

c(i) Compare the unemployment rate for Greece and Germany over the period 2006 to 2011. [2]

Similar : Both show increasing trend (1m) Difference: Unemployment rate for Greece is always higher than that for Germany (1m)


Many students were able to display the skill required for this question, by pointing out a similarity and difference.

Students failed to obtain full credit because they did not summarise the trend in unemployment and chose to explain year-to-year change in unemployment.

This is also important that even calculating rate of change for this question, the rate is not merely a difference in percentages. For example, the rate of change in unemployment for Greece is not a mere 8.2% (17.1 – 8.9 but 9%; (i.e 8.2/8.9*100)

c(ii) Discuss whether the data provided will lead one to conclude that the current and future standard of living for Germany is higher than Greece. [8]

Introduction (KIA)

Key Words The standard of living (SOL) encompasses both material and non-material aspect.

Issues / Approach

The answer will comment on the SOL between Greece and Germany using data given.

Current - Material SOL

Yes - Material SOL is higher in Germany

Unemployment rate in Germany is lower compared to Greece

Domestic consumption in Germany is higher than Greece When more people being employed and domestic consumption being higher in Germany, we can infer that the level of material SOL is higher for Germany

No - Material SOL is not higher in Germany

Domestic consumption does not measure how much each person consume, data should give consumption per capita.

There is also a need to include the income distribution (as measured by Gini coefficient) in Greece and Germany.

Other indicators such as the GDP per capita will also more useful as it consider the population of the countries.

In addition, a better indicator for comparing material SOL will be to use the GDP in PPP terms as it will measure the relative inflation between Germany and Greece.

If the increase in production leads to more NEGATIVE externalities generated (in the form of pollution), then cannot conclude if the non-material SOL for Germany is higher.

The higher level of production could also be at the expense of workers having to work longer hours and less leisure time.

Note: Students need to account for any 2 of these points.

Current - Non-material aspect of SOL is not higher in Germany If we compare social indicators such as life expectancy and infant mortality rates between the two

countries, inconclusive as to which country is better off in the non-material aspect of SOL

Future SOL

Future SOL – higher in Germany

If we compare the investment (i.e. Gross FCF), the fact that Germany is making more investment will meant that the increase in productive capacity will enable Germany to produce more in the next period (future) as compared to Greece

If we assume that the increase in German capacity in production of more G&S is for domestic consumption rather than imports, then we can conclude that the material SOL is higher for Germany)

Conclusion Based on the indicators given, it is inconclusive as to whether the SOL is higher for Germany.

L1 Candidate only explained material SOL with little or no elaboration on non-material and LT comparison in SOL. No attempt was made to link with data provided.

L2 Candidate explained material and non-material SOL but did not have LT comparison in SOL. Some references was made using data provided.

L3 Candidate provided an excellent explanation of the current and future SOL for Greece and Germany using data provided.


Many students failed to understand that while we can use the real GDP growth as an indicator of the SOL for a particular country over time, it is not a good gauge of SOL across countries. A country could have higher growth rates over another but still have a lower GDP. Hence the data is insufficient as there is no real GDP per capita figures for Greece and Germany.

Many students did not understand that life expectancy and infant mortality are social indicators to measure non-material SOL.

Many students failed to recognize that gross fixed capital formation (GFCF) gives an indicator of the future production capability of the country. As such, Germany which has a higher level of GFCF would have the possibility of higher SOL in the future.

Instead, most students referred to the austerity measures in Greece and concluded that future SOL must be lower since austerity measures have contractionary impact on the NI of Greece. When the question asks for future SOL, the examiner is asking for the productive capacity so you have to look at capital formation/investment expenditure.

Though students recognize that there are certain limitations in the data, they still concluded that Germany has a higher SOL compared to Greece.

(d) Discuss how the austerity measures will help alleviate the recession EU? [10]

Introduction (KIA)

Key Words Austerity measures that countries need to implement to restore confidence in the economy.

Issues Austerity measures are meant to help Greece and other European economies in returning to the initial agreement to control / limit gov’t budget deficit (within 3% of GDP) and debt ratio to GDP (to 60%). However, this may not alleviate the situation in the SR for most EU countries.

Approach This answer will consider the short and long implications of these measures on alleviating the problems in the EU countries.

BLOCK TEST ANSWERS

ECONSABLAZE :: 85

Body (Use SEEDS) – State, Elaborate, Exemplify (Data/ Diagram), Synthesis Thesis: Will not help (in SR): In the SR, the austerity that involves spending cuts may not help to alleviate the situation. We will now consider what the SR impact on the economy using the AD-AS model.

State (Austerity measure)

Exemplify (Evidences) Elaboration

1. Reduction in budget deficit =>Reduction in G

Extract 6 “cut in government spending” “New powers … the right to levy fines on countries that fail to comply with austerity measures to bring budget deficits to within the European Economic and Monetary Union’s 3 percent target” Extract 6: As a result of the harsh austerity measures, growth in EU is expected to be 0.2% this year. Note: This is to convey idea that the austerity measures have a contractionary effect on EU economies. Table 3: Recession in Greece from 2008 to 2011.

A reduction in the budget deficit can be brought about by a fall in G or/ and a rise in T) =>a fall in the G (which is a component of AD) will cause a fall in AD This will lead to a multiple

decrease in real NY (Use AD-AS or Y = AE to illustrate) causing the economy to go further into a recession.

This is manifested in country like Greece where from table 4, we can use that Greece has been experiencing a recession since 2008.

The austerity measures will therefore make the situation in Greece worse

2. Reduction in wages =>Reduction in Consumption/ fall in AD and increase in unemployment => (Some students may interpret as fall in wages leading to rise in AS due to lower Cost of production)

Extract 6: A pay freeze for most public sector workers Table 4: A fall in final household consumption expenditure

This pay freeze/ reduction in wages will result in a fall in household consumption as households tighten their “belts”. As C is a component of AD,

there will be a multiple fall in real NY via the multiplier process.

This will also cause a fall in employment.

Note: Students could possibly analyse this as leading to a rise in AS (due to lower cost of production) as wages stagnate/ fall However, one would also

argue that this fall in cost of production may not be significant as it is the public

sector’s wages that is affected. This may not trickle to all sectors of the economy and would also be dependent on the size of the public sector in most of the EU countries. Thus it is inconclusive then to assert that AS would increase based on data presented.

3. Increasing taxes for high income earners =>Increase in Direct taxes, rise in personal income taxes

Extract 6: Some higher earners will

also face higher taxes.

This will reduce the disposable income of households and will lead to a fall in household consumption. In addition, the higher taxes may reduce the incentive to work and in LR lead to fall in LRAS. Both of these effects will cause a fall in real NY and rise in unemployment.

4. Un-intended consequences of austerity measure - Reduce business confidence and lead to fall in investments AND weakening of the euro

Extract 5: Few investors or

businesses are brave enough to

make long-term bets on the Greek

economy in these conditions.

Investment is down by almost half

from four years ago

Extract 5: The currency has come

under heavy pressure as investors

wonder if Greece’s fiscal crisis will

spread to other heavily indebted

economies within the EU. The euro

in the past six months has fallen by

about 17% against the US dollar as

investors rushed to ditch the

currency

Some of the un-intended consequences of the austerity measures is a fall in business confidence => this will lead to a fall in investments by firms This has the same

deflationary effect on the economy as FALL in C and G as I is a component of AD

In addition, investors may lose confidence in the euro and sell it in the forex market. This will cause the forex to depreciation of the euro viz-a-viz other currencies. An depreciation should have

an expansionary impact on the economy through an increase in X and possibly an inflow of FDI

However, from table 1, we can see that the inflow of FDI for Greece has fallen since 2009. So the impact on FDI is not positive one for Greece.

BLOCK TEST ANSWERS

ECONSABLAZE :: 87

Evaluation: However, it is to be noted that the austerity measures may not hurt all of EU countries in the same negative way as Greece. If we examine the German economy, we can see that the except for 2009, it has enjoying economic growth from 2006 to 2011 (TABLE 4).

Anti-thesis: Will help The austerity measures are aimed at restoring confidence. Extract 6 “In the short term, Europe is being forced to demonstrate to investors it can manage its deficits to bring back confidence in the region”. This will help the economies from sliding further into recesssion At the same time, Europe should use this as an opportunity to re-structure their economy to be more competitive by raising workers’ productivity. Extract 6, “But in the longer term, it will have to show a political will to increase productivity”.

State (Austerity measure)

Exemplify (Evidences) Elaboration

1. Many of the EU countries such as Greece must get their budget deficit down.

Extract 5: “Greece needs to reduce its debt to GDP ratio from the current 160% to 120.5% by 2020.” Extract 6: Europe is being forced to demonstrate to investors it can manage its deficits to bring back confidence in the region”.

Previously, the ease of credit has made many of these gov’t being laxed and they did not exercise prudence in their budget.

In reducing the public sector debt ratio in many of these countries, the intention is to restore investors’ confidence Note: In SR, this may not be beneficial to the economies but the aim of these measues is to prevent the economies from sliding further.

Evaluation: Even though it is mentioned in the extract concerning the supply-side slant of the austerity measures, there is no additional information other than curbing of budget deficit and to within the EMU 3 % target. (extract 6).

Synthesis (FEAST)

1. The austerity measures in themselves may not result in improving the competitiveness of European economies as the gov’t in many of these countries would still need to contend with powerful trade union with established “labour laws that make hiring and firing difficult”.

2. In addition, we are unclear of what the supply-side policies are. It seem that the over-riding aim is simply to tame the budget deficit / and the debt to GDP ratio. There is no mention of gov’t spending on infrastructure, education and training that will increase the LR productive capacity of the EU economies. In fact, if we examine the level of investment (for Greece, table 1), their focus on austerity is leading to a lower level of capital formation which may hurt their LR capacity (i.e. LRAS).

3. In the face of the deflationary effects of austerity measures, the more appropriate policy that should be pursued in the SR may be demand management policies (i.e. increasing G) while at the same time targeting productivity to raise the competitiveness of the economy; which are longer term measures. This is in line with such Keynesian economists like Krugman who felt that “the right thing, overwhelmingly, is to do things that will reduce spending AFTER the economy has recovered”. (extract 6)

Conclusion

The austerity measures will make the situation worse for EU countries but if it can use the time to restructure its economy, then will help in the LR as the economy becomes more competitive.

L1 Candidate was not able to explain what the austerity measures entailed and merely

explained any contractionary policies (such as fiscal or monetary) with no reference made to

case.

L2 Candidate made some references to case with more detailed and accurate explanations of

what the austerity measures entailed. They may not have use diagrams and only presented a

one-sided view.

L3 Candidate made good references to case with excellent explanations accompanied by

appropriate diagrams.


This question is not well-attempted with many students getting a L1 for analysis.

The main weakness lie in the fact that students were generally not able to see the real intent of the austerity measures and were not able to see that in the SR, the austerity measures would actually contract the economy.

In terms of understanding context, there were some students that explained with the contraction in the economy, general price level (inflation) will decrease and this will boost the export sector as Europe’s exports will be more price competitive. While this is correct analysis, this failed to understand that in a recession, prices will be already low and a lowering of the AD over the Keynesian Range in the AD-AS framework may not work to further reduce the general price level.

Many students simply identified the measures as fiscal policies without recognizing the supply-side impact (i.e. wage cuts) on the economy. As such, they did not see tht SRAS could be increased due to the reduction in cost of production.

Many students also failed to give a good evaluation to the question with many simply saying that instead of fiscal policies, supply-side and monetary policies should be used.

Some students also confuse fiscal debt with balance of trade/payment deficit

Some students immediately equated austerity measures to contractionary fiscal policy or worse monetary policy

A handful of students explained that austerity measures help to reduce fiscal debt hence government can spend on other areas and G increases. These students failed to recognize that austerity measures aims to reduce government spending any increase in G should not be immediate.

Many students also failed to use AD/AS analysis in their analysis ie. These answers tend to be descriptive.

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