Case Study Q2 (H1 Cambridge Q 2007) a) Using the data in table 1: (i) Explain what is meant by GDP per

capita. (2) (ii) Summarise the economic performance of Singapore compared to that of Japan. (2) (i) (ii) GDP per capita is the value of output produced domestically available to each one in the economy. Singapores growth rate is about 6 times as much as Japan. The amount of goods Singapore can buy is almost comparable to that of Japan measured using PPP, US$.

b)

Explain how an appreciation of the yuan against the US dollar could contribute to a reduction in the US trade deficit with China. (4) An appreciation of the yuan against the US dollar will result in a rise in price of exports pay in US$ and a fall in price of imports pay in yuan. Americans will reduce their import from China and if demand for import is elastic, value of import will fall. Likewise, Chinese will buy more of Americans export as it is now relatively cheaper and if demand for export is elastic, value of export rises. Hence, US trade deficit is reduced.

c)

Explain how moving towards a floating currency will give the Chinese an extra lever to control the economy (extract 5). (4) While the government may often use monetary policy to contain inflation, the move towards a floating exchange rate will allow the Chinese government to vary the exchange rate within a desired band to influence her export and import prices and thus achieve more policy goals issues like imported inflation and also balance of payment. Also, with this extra leverage, fiscal policy with supply-side element could be adopted exclusively to promote economic growth.

d)

Comment on Malaysias stated goal of becoming a fully developed nation by 2020 (Extract 8). (4) A fully developed nation is one that is comparable to Japans GDP per capita (US$) contrast to that of Vietnam and Indonesia (table 1). Malaysia GDP per capita is about less than one-third that of Japan and the presence of a relatively wide gap may pose difficult to Malaysia of becoming a fully developed nation by 2020. Moreover, the presence of fiscal difficulty like the lack of investment and efficient infrastructure may hinder her from sustaining a rapid growth rate to achieve the desired objective.

e)

Explain why a strengthening of a countrys currency could help to suppress inflation and stimulate consumer demand. (Extract 5) (6) When the currency is strengthen relative to that of trading partners, prices of imports is lower when paid in home currency. This means a lower cost of production for producers as prices of import of raw materials and component parts become relatively cheaper. When it is translated into lower consumer prices, inflation is suppressed. Simultaneously, a lower inflation rate relative to trading partners also imply that local consumers will switch to buy locally produced goods as they are now relatively cheaper than imports and thus stimulates domestic demand.

f)

Discuss the different attitudes towards free trade of China and Malaysia on the one hand and some EU countries on the other. (8) Free trade is the movement of goods and services across international border without restrictions. Countries like China and Malaysia advocate free trade contrast to some EU countries which practices protectionism. There are numerous gains from trade. China and Malaysia, with relatively abundance of human resources, incur a lower opportunity cost in the production of low value added labour intensive products like textiles and low end manufacturing products. When they specialise according to the theory of comparative advantage, worlds output is raised and with given suitable terms of trade, they gain as they could consume beyond their PPC. With an enlarge international market, they could also explore economies of scale and with lower production costs, translated into lower prices, raising consumers welfare. Also, China has benefited much from free trade as her exports are competitive, resulting in higher export earnings and a favourable trade account. However, some EU countries like Spain, Italty and Portugal faced the threat of cheap imports from China (extract 7) and the failure of their local producers to compete efficiently means rising job loss and slow growth. Moreover, it has been argued that such continuous influx of cheap imports could possibly worsen some EU countries balance of payment. Hence, some EU countries to reduce massive imports, impose tariffs or quotas on their trading partners. China to avoid trade sanctions, voluntarily restrict how export growth to EU countries (extract 7). Such protectionistic measures adopted that help to shelter inefficient industries only help to buy time for them to restructure and should not be imposed permanently as substantial welfare loss is a price the economy has to pay. In fact, the government should assist these industries to revamp and to explore new niches where comparative advantage lies.