SRJC JC2 H1 Econs / 2018 / Workbook - Economic Growth

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ECONOMIC GROWTH
SECTION A: SELF-REGULATED LEARNING
What I know about the What I want to learn, i.e.

What remains unanswered How will I find the
topic questions I need/want to What I have learnt
for me? answers?
(Review) ask
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SRJC JC2 H1 Econs / 2018 / Workbook - Economic Growth

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SECTION B: SHORT STRUCTURED QUESTION
1 Explain one possible impact of negative growth on consumers. [2]
Negative growth means there is falling real national income of the country  reduced income
of residents in the country  reduced purchasing power  consumers less willing and able to
buy normal goods and services including essentials such as food and transport  less wants
satisfied  consumer welfare compromised.
OR
Negative economic growth means there is a drop in national income  fall in production of
goods and services  there is less output  less derived demand for labour  lower
employment for consumers.
2 Explain one possible impact of negative growth on producers. [2]
Negative growth means there is falling real national income of the country  reduced income
of residents in the country  reduced purchasing power  consumers less willing and able to
buy normal goods and services fall in demand  fall in total revenue, assuming cost constant
 fall in profits  producer welfare compromised.
3* Explain two possible factors that could have led to a fall in GDP in Singapore.
[7]
There are two factors which could lead to a fall in GDP. A fall in aggregate demand (AD)
and/or a fall in aggregate supply (AS). However, due to the characteristics of the Singapore
economy, which is small and open to external trade, the main causes of a fall in GDP could
be due to :
 External reasons such as fall in (X-M) and fall in the levels of foreign direct
investment (FDI)
 Supply shock that leads to a fall in AS can also cause a fall in GDP
Pick either Point 1 or 2 for an AD factor
P1: A possible factor for the fall in GDP in Singapore is due to a fall in (X-M) causing AD
to fall.
E+E: Fall in export revenue due to rise in foreign competitors or recession in other economies.
E.g. Global recession in 2009  Fall in world incomes  Fall in demand for Singapore’s
manufactured exports and tourism (E.g. Singapore expected tourism revenue to plunge as
much as 19% in 2009 as a global economic slowdown undermines spending on travel.)  Fall
in export revenue  ceteris paribus, net exports fall  AD falls , ceteris paribus  there is a
surplus of goods and services causing a downward pressure on price  when price falls, level
of AD rises as various sectors reduce C, I, G due to higher prices, while firms will reduce output
due to lower profits  fall in real national output  [link to the condensed k process]
[Condensed K process]
i. The fall in national output in turn leads to a fall in incomes which will lead to a decrease
in induced consumption which leads to a further fall in NY which will caused induced
consumption to fall further.

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ii. The amount of fall in induced consumption is determined by the value of marginal
propensity to consume (MPC).
iii. The higher the value of MPC, the greater is the fall in induced consumption and hence
the larger is the fall in national income.
iv. The multiplier process continues until the initial fall in injections is equal to the total fall in
withdrawals. Hence, the economy reaches a new equilibrium national income (GDP) at
a lower level, i.e. Y1  multiple fall in real GDP.
Since Singapore is highly dependent on trade, i.e. external demand accounts for over 60% of
total demand, a fall in GDP is likely to be caused by a fall in external demand.
General Price Level
AS
AD” AD’ AD0

AD1
$100m
P1
0 Y1 Y0 Real GDP
OR
P1: Poor investors’ confidence could also cause a fall in AD resulting in a fall in GDP.
Poor investor confidence due worsening global economic conditions  fall in the expected
level of profits  firms will reduce their investment expenditure as they reduce their inventories
level and capital investment  Moreover, due to the worsening economic conditions, foreign
firms may not be willing to invest in Singapore as these foreign firms are likely to be more risk
adverse  the level of Foreign Direct Investment into Singapore falls  I falls  AD falls ceteris
paribus  there is a surplus of goods and services causing a downward pressure on price 
when price falls, level of AD rises as various sectors reduce C, I, G due to higher prices, while
firms will reduce output due to lower profits  fall in real national output  [link to the
condensed k process]
i. The fall in national output in turn leads to a fall in incomes which will lead to a decrease
in induced consumption which leads to a further fall in NY which will caused induced
consumption to fall further.
ii. The amount of fall in induced consumption is determined by the value of marginal
propensity to consume (MPC).
iii. The higher the value of MPC, the greater is the fall in induced consumption and hence
the larger is the fall in national income.
iv. The multiplier process continues until the initial fall in injections is equal to the total fall in
withdrawals. Hence, the economy reaches a new equilibrium national income (GDP) at
a lower level, i.e. Y1  multiple fall in real GDP.
Many of our firms’ production caters to overseas market. Thus, any change in the global
economic condition is likely to affect our firms’ confidence about the future and lead to a fall in
GDP.

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P2: Another reason for the fall in real GDP could also be due to a fall in AS as a result of
tightening of immigration rules. (any reason for a fall in AS due to rise in cost of
production: e.g. external shocks of oil price rise, wage pressures)
Tightening of restrictions on foreign workers in recent years  fall in labour supply  shortage
of labour exerts upward pressure on price of labour  rise in wage rate > rise in productivity
 cost of production of firms increase  AS of the economy would fall  AS curve shifts to
the left from AS1 to AS2 (both SRAS and LRAS could be affected) real national output falls
from Y1 to Y2, ceteris paribus  fall in GDP.
General price level
AS2
AS1
P2
P1
AD
0 Y2 Y1 Real GDP
Given the lack of resources including our small domestic population and reliance on foreign
workers, the change in foreign workers policy could be one of the main AS factor leading to a
fall in real GDP in Singapore.
4* To what extent should a government be concerned about a fall in GDP? [12]
Introduction
Clarify key terms: Every government has four macro-economic objectives that it seeks to
achieve, i.e. sustained economic growth, low unemployment, low inflation and a healthy
balance of payments. When GDP falls in two consecutive quarters, the economy is said to be
experiencing recession.
Direction of response: A government should be concerned about a fall in GDP as it

compromises on the ability of the government to reach the macroeconomic goals. However,
the extent of its concern can be examined via using the ‘Severity’ ‘Cause’
‘Conditions/Characteristics’ framework. The framework examines the severity of the fall in GDP
problem (whether there is a big or small fall in GDP, whether the fall is in the SR or LR), the
cause of the fall in GDP (whether it is caused by external or domestic factors) and the
characteristics/conditions of the economy (ie. Initial state of economy or macroeconomic
priority of the government etc).

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Body
P1: Governments should be concerned to a large extent with a fall in GDP because there
are consequences of the fall in GDP especially when the fall in GDP is large (severity)
and it occurs for a prolong period of time (LR)
E+E:
(Explain any 2 consequences of a fall in GDP)
(i) Decreases the standard of living
Standard of living falls if there is a fall in GDP. A fall in GDP means that national income
decreases. Ceteris paribus, this means that people’s purchasing power has decreased. Hence,
they are less able to buy and enjoy goods and services, leading to a fall in their material
standard of living.
Government tax revenues may even fall when there is a fall in GDP as people’s incomes
decrease. As a result, the government would not be able to fund new economic development
projects such as improving transportation facilities or healthcare system  rising occurrence
of traffic delays due to congestion and long wait time to receive medical attention  lower
quality of life  the non-material standard of living will fall.
(ii) Prolong economic downturn and rise in unemployment
In addition, a fall in GDP decreases firms’ and consumers’ confidence as they feel that the
economy may take a long time to recover. As a result, investment and consumption would fall.
This would bring about a further fall in aggregate demand and thus a drop in, national output
and employment, thus worsening the slow / negative growth.
If people become unemployed for a long time, their skills could become out-dated. This makes
it difficult for the workers to move on to expanding industry when economy undergoes structural
changes as a policy response to the recession. Hence, the cyclical unemployment arises from
the fall in AD.
Linking statement: Hence, when there is a large and prolong fall in GDP, governments
should be concerned to a large extent as there will be a fall in SOL and unemployment.
P2: However, the extent of governments’ concern depends on some criteria such as:
(i) Cause of the fall in GDP (whether its caused by domestic or external factors
(ii) Existing conditions/characteristics of the economy (ie. if there were an initial
problem of inflation or environment degradation)
(i) If the cause of the fall in GDP is due to external factors, government should be
more concerned than if the cause is due to domestic factors
E+E
If the cause of the fall in GDP was due to a global economic recession, the national incomes
of trading partners will fall, reducing their purchasing power and hence DD for Singapore’s
exports falls. Given Singapore’s dependence on net (X-M) which is 32% of the GDP, a fall in
net (X-M) will lead to a large fall in AD and NY of the Singapore economy. As external factors
like these cannot be controlled by domestic government, it causes the country to be vulnerable
to external fluctuations, hence it will be a more severe problem as compared to a fall in GDP
that is caused by domestic factors.

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A fall in domestic consumption due to a removal of personal income tax rebates that was given
in previous years would be less of a concern because it is a SR problem. The fall in C due to
lower disposable Y might only happen in the SR, and the levels of C will revert back to normal
levels once consumers are adjusted to the levels of disposable Y. In addition, government can
easily revert back to providing income tax rebates should the fall in C persist.
Link statement: Hence, a fall in GDP caused by external factors will be more of a concern
as compared to a fall in GDP caused by domestic factors.
(ii) The extent of the fall in GDP problem would also depend on the
existing/prevailing economic conditions in the economy
E+E:
If the fall in GDP occurs after years of rapidly rising GDP which causes the country to suffer
from inflation and environment degradation, the fall in GDP could provide relief by reducing
overheating of the economy.
During periods of high inflation, investors’ confidence will be weakened as they find it hard to
make accurate projection on expected returns  fall in foreign direct investments in the country
and capital flow out as foreign investors relocate and set up their firms elsewhere  fall in
levels of I which will in turn lead to a fall in AD and AS (prolong economic downturn and rise in
unemployment.) If the fall in GDP will allow DD pull inflation to be brought down, the level of
investors’ confidence could rise, reverting the further fall in economic downturn.
Moreover, the drop in GDP may allow the natural resources to replenish and reduce the
deterioration of the environment. For example, it is common that environment degradation may
occur during period of rapid economic growth in a country as the large rise in production of
goods and services generate pollutions which reduces the quality and quantity of resources
such as land. This will reduce the potential growth of the economy and the rapid growth would
not be sustainable. In this situation, a government may not be too concerned with a drop in real
GDP as the economy finds a way to manage the usage of resources. Thus, government may
be willing to accept a trade-off of negative growth in the near future for sustainable growth.
Link statement: Hence, a fall in GDP that provides relief to a previously overheating
economy would not be such a large concern.
Conclusion
In conclusion, the government has to consider the extent of the fall in GDP as well as the
economic conditions at that point in time before deciding on the appropriate level of concern.
The government will also need to look at whether the fall in GDP is a one-off event or a
persistent trend. To a large extent usually, a falling GDP for an extended period of time will be
a large cause of concern as it can compromise other macroeconomic goals as well for the
country.
Level Descriptor
L3 For an answer that is able to analyse clearly the extent of government
concern by considering the two criteria of the severity of the fall in GDP
as well as the existing economic conditions prevailing in the economy.
L2 For an answer that is able to explain clearly why the government should
be concerned with a fall in GDP and make some attempt to analyse the
level of concern by considering at least one factor such as the extent of
the fall in GDP or the existing economic conditions prevailing in the
economy. Some conceptual errors in explanation.

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L1 For an answer that shows some awareness of why the government

should be concerned with a fall in GDP but conceptual errors are
evident.
Evaluation Descriptor
E2 For coming up with two criteria to examine the extent of the GDP
problem supported with analysis
E1 An unexplained judgement  an unexplained evaluative
comment/conclusion
SECTION C: CASE STUDY QUESTIONS

Qn 1: 2016 SRJC H1 STAR Test
Generating and sustaining economic growth
Extract 1: China’s economy grows robust 7.7% but signs of slow down emerge
China’s economy grew by a robust 7.7% last year, one of the strongest performances
globally, although signs of a slowdown emerged late in the year as authorities tried to rein in a
debt-fuelled investment growth binge. China’s economy has cooled since recording double-
digit growth rates in the run-up to the financial crisis of 2008, but it has been propped by a
surge in investment in infrastructure and real estate. Amid concern that the debt burden was
rising to dangerous levels, authorities tightened credit at the end of 2013, and investment
growth slowed.

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The Communist Party has been aiming to maintain a fast pace of economic growth. But this
growth-at-all-costs strategy has not only wrought damage on the environment but has also
allowed imbalances to build up within the economy, which relies more on investment than
domestic consumption. Experts say the investment binge cannot be sustained without wasteful
spending and a mountain of debt.
Source: Washington Post, 20 January 2014
Extract 2: Catching the dragon
Economists have tentatively suggested that within a year or two, India’s economy might be
growing more quickly than China’s. Indeed, the India economy has been doing better after Mr
Modi’s pro-growth government took charge since last May’s elections. Foreign investment
inflows remain steady with the rupee maintaining its strength. The central bank has even
expanded its foreign-exchange reserves to a record $330 billion—thus keeping the rupee from
rising by more.
The economy is likely to pick up further. The recent falls in commodity prices, which have hurt
raw-material exporters such as Brazil, Russia and South Africa, are a boon for India, which
imports 80% of the oil it consumes. Rich economies may fret about the dangers of falling prices
around the world; Indians, on the other hand, are pleased they no longer have double-digit
inflation at home. The diminishing threat from inflation has already prompted India’s central
bank to reduce interest rates in January, from 8% to 7.75%. More cuts are expected this year.
Source: The Economist, 9 February 2015
Extract 3: Singapore exports slow on global demand

The surprisingly slow global economic recovery was the cue for local economists to drastically
cut their forecasts for Singapore's export performance this year. Exports had earlier been
expected to climb 4.1% for the year but that prediction was slashed to -1.1%.
Economists said the dramatic turnaround in their estimates stemmed from falling demand for
the type of electronic products made here. And although economic restructuring efforts are
making services a bigger component of the economy, activity in this sector is not reflected in
export data.
Economist Song Seng Wun said that Singapore's electronic exports in particular continued to
struggle, partly due to weaker demand for products such as disk drives and semi-conductors.
The electronic industry makes up about a third of the manufacturing sector, which in turn
accounts for a fifth of economic output. It would take an "almighty lift" from non-electronic
exports for overall non-oil domestic exports to grow this year, he noted.
Economist Chua Hak Bin said that pharmaceutical exports have also been poor, although that
has been somewhat mitigated by a better showing in petrochemicals and chemical products.
The more optimistic forecast of 4.1% growth in exports was based on an expected pick-up in
external demand but that has been slower than expected. Recovery in the United States has
been less import intensive, not providing as strong a lift to Asian exports as in the past. Slower
China growth is also weighing on Asia’s and Singapore’s export performance.
Another issue is that economic restructuring and stricter foreign worker policies are also hurting
labour-intensive industries such as manufacturing, which may be losing competitiveness. But
other economists note that some manufacturers still continue to invest here even though they

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know Singapore is not the cheapest place, indicating that the country still retains some of its
competitive edge.
Analysts noted that economic restructuring and innovation will become more important to
improve efficiency as Singapore cannot count on a pickup in global demand to drive the
economy. Growth in the advanced world may remain sluggish as some major economies have
yet to see solid recovery after the global financial crisis.
Source: The Straits Times, 15 September 2014 & MAS Monetary Policy Statement, 14 Oct
2014
Table 1: Real GDP Growth (% Change)

Country 2013 2014 2015*
India 6.9 7.2 7.5
China 7.7 7.4 6.8
*forecasted data
Source: IMF World Economic Outlook, accessed July 2015

Table 2: Selected economic indicators of China
China 2012 2013 2014

Real GDP growth 7.8 7.7 7.4
Inflation 2.4 2.2 0.9
Unemployment Rate (%) 4.1 4.05 4.09
Current Account
215 482 148 332 219 902
Balance (USD million)
Source: Various
Questions
(a) (i) Using Table 1, compare the real GDP growth rates of India and China
from 2013 to 2015. [2]
(ii) With reference to extract 2 and using AD/AS analysis, account for India’s
growth rate. [4]
(b) Using Table 2, comment on the economic performance of China in 2014. [5]
(c) With reference to the data, discuss the impact of China’s ‘growth-at-all-costs
strategy’ on its standard of living. [6]
(d) Assess the view that ‘an almighty lift from non-electronic exports’ (extract 3)
will boost Singapore’s gross domestic product. [8]

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[Total: 25]
Suggested answers
(a) (i) Using Table 1, compare the real GDP growth rates of India and
China from 2013 to 2015. [2]
 Real GDP growth rates of both countries are positive

 But India’s real GDP growth rate is rising while that of China is
declining.
(ii) With reference to extract and using AD/AS analysis, account for
India’s growth rate. [4]
Any 2 reasons behind India’s faster growth rate

 Lower commodity prices  imported raw materials become
cheaper  lower cost of production  firms now more willing to

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increase their output  SRAS shifts to the right  higher GDP

hence growth
 Lower interest rates  cost of borrowing lowered firms and/or
consumer will be more willing to borrow $ firms and/or
consumers will increase Investment and/or consumption
sparking faster growth in AD  higher GDP hence growth
 Steady flow of foreign investment  as firms are optimistic about
India economy given is high growth rate in the past few years
higher Investment  higher AD  higher GDP hence growth
 Prevent rupee from rising to maintain export competitiveness.
Px will increase slower than its competitors and thus DDx
increases. Hence higher AD and GDP thus growth
General price level

AS
E1
P1
E0
P0 AD1
AD0
0 Y0 Y1 Real national output

 AD rose  AD shifts right from AD0 to AD1 ceteris paribus  At P0, shortage
of goods and services  prices go up. As prices increase, movement up
the AS curve as there is an increase in real national output. At the same
time, level of AD falls. Prices keep on rising until shortage is eliminated. At
the new equilibrium point E1, the general price level rises from P0 to P1 while
real national output rises from Y0 to Y1 (assume economy not at Yf).
Therefore India real GDP grew.
General price
level
P0 E1
P1
E0
AD
AS0
AS1
0
Y0 Y1 YF Real national
output

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 When aggregate supply increases, the AS curve will shift from AS0 to AS1.
At P0, the level of aggregate supply exceeds the level of aggregate demand.
Hence, there is surplus of output. This will drive the general price level
down. The general price level will keep on falling until E1 is attained. At the
new equilibrium E1, the general price level is lower at P1 while the real
national output is greater at Y1. Therefore India real GDP grew.
(b) Using Table 2, comment on the economic performance of China in

2014. [5]
 Economic performance is measured by the 4 main macroeconomic

indicators – economic growth, inflation, unemployment and balance of
payments
 The data shows positive real GDP growth rate though it has slowed
down slightly compared to the previous year. Inflation rate is low at 0.9%.
These data show cost of living is highly affordable with positive
purchasing power and consumption. Thus there is no significant fall in
China’s material living standard.
 Its current account registers a surplus which has also risen significantly
compared to the previous year. This data indicates its exports are
internationally competitive thus a healthy balance of payments, ceteris
paribus.
 Therefore, one can conclude that China’s overall economic performance
is good in 2014.
(c) With reference to the data, discuss the impact of China’s ‘growth-
at-all-costs strategy’ on its standard of living. [6]
THESIS: Positive impacts of China’s strategy on the economy
 Evidence: Table 1 on its growth rate. This strategy has been propelling
its growth in real GDP and thus SOL of living.
Analysis: Its AD is rising via export led growth seen in its healthy current
account balance in Table 2. The rise in AD will brings about a rise in
GPL and real national output. The rise in real national output means that
its citizen will now be able to enjoy more goods and services. Therefore
material SOL improves. Additionally if an increase in national income
would also result in higher tax revenue for the government. This would
allow them to spend on merit goods such as healthcare and education
which has positive externalities and will also bring up the quality of life.
Thus non-material SOL improves.
ANTITHESIS: Negative impacts of China’s strategy on the economy
 Evidence: Extract 1” wrought damage on the environment”.

Analysis: Higher growth will lead to market failure without government
intervention as firms strive to raise output to increase profits without a
care for the environment. Hence production of this good will result in
negative externalities, bring harm to 3rd parties. It will also lead to a fall

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in non-material living standards and lower quality of life as a result of

environmental pollution.
 Evidence: Extract 1” propped by a surge in investment in infrastructure
and real estate…. debt burden was rising to dangerous levels’.
Analysis: Such rapid growth was overheating the economy and is
fuelled by credit due to excessive borrowing from the banks. This will
lead to demand pull inflation. If inflation rate outgrows the growth in
nominal national income this could lead to a fall in real national income
thus bring about a fall in standard of living.
Conclusion (with evaluation)

Given that China’s inflation rate is still relatively low (as seen from table 2), it
seems that China’s growth-at-all-cost-strategy will still bring about an increase
in material SOL. However this is likely to come at the expense of the non-
material SOL.
Level 1 For description and explanation of only positive or negative impacts

on the standard of living
Level 2 For identification and explanation of both positive and negative
impacts on China’s standard of living.
E For a well justified conclusion
(d) Assess the view that ‘an almighty lift from non-electronic exports’
(extract 3) will boost Singapore’s gross domestic product. [8]
Introduction
Singapore faced slower than expected export demand with export revenue
expected to dip by 1.1%. With export revenue falling, its economic growth is
likely to slow or fall with its AD falling. The impact on GDP would be significant
given Singapore’s export oriented economy.
THESIS: An almighty lift from non-electronic exports will help boost Singapore’s
GDP.
 A rise in non-electronics exports will help to fill the gap left by the fall in
electronics export. This will help to maintain or even raise AD  shortage
of goods & services  prices go up. As prices rise, there will be a rise in
the level of AS thus there is an increase in real GDP. At the same time, level
of AD falls. Prices keep on rising until shortage is eliminated. At the new
higher equilibrium point, the real GDP rises.
ANTITHESIS 1: However an almighty lift from non-electronics exports may not

boost Singapore’s GDP because of falling demand of exports in other sectors.
 Evidence show that “pharmaceutical exports have also been poor’
stated in extract 3. Furthermore, the main issue is that export demand is
not picking up as it should as recovery in US is ‘less import intensive’.
This implies that they are not buying as much imports (which are Spore’s
exports) as before despite an economy recovery. Thus the spillover

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benefit of an economic recovery on Spore is small. Spore’s exports

revenue will still be slow or even decline. As AD falls  surplus of goods
& services  prices fall  fall in level of AS while rise in the level of AD
until the surplus is eliminated. At the new lower equilibrium point, the
real national output falls  employment falls. Spore may enter into a
recession leading to a fall in its national income.
ANTITHESIS 2: In addition to that, almighty lift from non-electronics exports

may not boost Singapore’s GDP because of falling AS
 The government is embarking on tighter foreign worker policies as

evidenced in extract 3. This is expected to cause shortage of workers
and drive up wages. Costs of production rises and AS falls. The falling
AS will thus bring about a fall in real GDP.
Conclusion (with evaluation)
If Singapore is successful in its economic restructuring and innovation, it will

help negate the rising cost of production arising from tightening of foreign
workers policies. At same time the improved efficiency could also help make
Singapore exports more competitive and thus boost exports in the other sectors
too.
Level 1 For explaining how an almighty lift from non-electronic exports will boost
Spore’s GDP however answer fail to consider why the almighty lift from
the non-electronic export may not boost Singapore’s GDP
Level 2 For a thorough explanation of how an almighty lift from non-electronic

exports will boost Singapore’s GDP. Answer also considered why the
almighty lift from the non-electronic export Singapore will help boost
Singapore’s GDP.
E For a well justified conclusion
Qn 2: 2015 SRJC H1 STAR Test
Is Growth Sustainable for Asia?
Extract 1: Asian Economies Heading Towards Full Recovery in 2010
The global recession, which started late 2008, hit Asia hard as its economies were mainly
powered by manufacturing sector that exports most of the products to industrialized economies.
Thanks to swift government response -- including reduction of interest rates, decreasing bank
reserve requirements and stimulus spending -- Asian economies led the global recovery from
the worst recession in decades. The Asian Development Bank (ADB) said the region's GDP
would grow by 4.5 percent last year, a rate higher than many other parts of the world.
Experts, however, also warned that early signs of growth will not necessarily translate to a long
term recovery, especially as export-reliant Asian economies were still hinged on the
performance of developed countries in 2010. And there are no indications yet that the crisis
that crippled the U.S. and Europe is finally over. The raft of weak economic data released in
the United States this week points to a prolonged patch of slow growth in the world’s largest
economy.

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Dominique Strauss-Kahn, chief of International Monetary Fund (IMF) said China and India will
continue to drive the regional economy. Indonesia is expected to lead the recovery for ASEAN
countries. The IMF has raised its estimation for Indonesia's GDP growth rate to 5.5 percent this
year. Malaysia, the Philippines and Thailand will record GDP growth around 3 percent in 2010
and Singapore around 4 percent. A question is thus raised for Asian governments in 2010 on
how and when to implement their exit strategy – the unwinding of previous policy.
Adapted from English.news.cn, 2010
Extract 2: Sustainable Growth
Asia must look at boosting domestic demand to cut its reliance on foreign consumers,
especially in the hard-hit United States, IMF chief Strauss-Kahn said. "Asian countries
themselves have a big enough market to generate the demand now developed countries fail
to," said Zhao Xiaoyu, Vice-President of ADB, "but this requires countries to make concerted
efforts under regional cooperative platform."
On Jan. 1, China's Free Trade Agreement (FTA) with ASEAN came into effect, an important
step for Asia's cooperation that could spur much-needed regional investment. The China-
ASEAN Free Trade Area (CAFTA), the world's largest free trade area of developing countries,
covers a population of 1.9 billion and accounts for about 4.5 trillion U.S. dollars in trade volume.
China's Deputy Commerce Minister Yi Xiaozhun said China's investment in Southeast Asia
would rise rapidly as firms become more eager to go abroad to invest.
Under the FTA, the average tariff on goods from ASEAN countries to China is reduced from
9.8 percent to 0.1 percent. The six original ASEAN members -- Brunei, Indonesia, Malaysia,
the Philippines, Singapore and Thailand -- slashed the average tariff on Chinese goods from
12.8 percent to 0.6 percent. “Both China and ASEAN should make full use of investment funds
and other resources and step up infrastructure construction to meet the need of further trade
cooperation,” Yi said.
Adapted from English.news.cn, 2010
Table 1: GDP Growth Data for Selected Countries
Nominal GDP Real GDP Growth Forecasted GDP

(US$ billions) (%) growth
(%)
2008 2009 2010 2009 2010 2011
United 14296.9 14043.9 14582.4 -2.7 2.9 2.5
States
United 2567.5 2173.2 2246.1 -4.9 1.3 1.5
Kingdom
Japan 4879.9 5033.0 5479.9 -6.3 5.1 -0.6
China 4521.8 4991.3 5878.6 9.2 10.3 9.0
India 1213.8 1380.6 1729.0 9.1 9.7 8.6
Malaysia 221.8 193.1 237.8 -1.7 7.2 5.5
Singapore 189.4 183.3 222.7 -0.8 14.5 4.8
South 931.4 834.1 1014.5 0.3 6.2 4.2
Korea
Thailand 272.6 263.7 318.8 -2.3 7.8 4.3
Source: The World Bank Data (various years)
Table 2: Price and Job Data for Selected Countries (2009)

16
United Japan China Singapore Malaysia South Thailand

States Korea
Consumer -0.4 -1.4 -0.7 0.6 0.6 2.8 -0.8
Prices
(%)
Unemployment 9.3 5.0 4.3 5.9 3.7 3.6 1.2
Rate
(%)
Source: The World Bank Data (various years)
Extract 3: Emerging Markets ‘Risk’ Overheating
Emerging market economies*, growing almost three times faster than their developed
counterparts, need to speed up spending cuts and interest rate increases as they fight inflation
and overheating, the World Bank said yesterday. While developed nations contended with high
unemployment and a European debt crisis that poses risks to global growth, many emerging
economies have not yet taken advantage of their strong expansion to remove the fiscal stimulus
enacted to cushion the global recession.
Emerging economies now account for almost half of global crude-oil demand and China
absorbs 40 per cent of the world’s metal supplies, contributing to the increase in prices
observed since the recovery. In addition, China contributed the largest national increment in
global oil consumption of about 10.4%. The rise in commodity prices and the strong capital
inflows have contributed to faster inflation, which in developing countries was close to 7 per
cent in April from a year earlier, more than 3 percentage points higher than in July 2009,
according to the report.
Adapted from My Paper, 9 June 2011

An emerging market economy (EME) is defined as an economy with low to middle per capita income. These
economies have embarked on economic development and reform programs, and have begun to open up their
markets and "emerge" onto the global scene. EMEs are considered to be fast-growing economies.
Questions
(a) Explain the difference between nominal Gross Domestic Product and real Gross
Domestic Product. [2]
(b) To what extent can it be concluded from Tables 1 and 2 that Singapore’s economy
performed worse in 2009 than South Korea’s? [5]
(c) Using Extract 3, suggest possible reasons for the difference in the growth rates between
the emerging market economies and the developed nations. [4]
(d) (i) With the help of an AD/AS diagram, explain how the ‘swift government
response’ (Extract 1) helped the Asian economies to recover from the
global recession in 2009. [6]
(ii) Assess the need for Asian economies to ‘unwind previous policy’ after 2010 as
mentioned in Extract 1. [5]

17
(e) The IMF chief proposes that Asia should boost domestic demand to cut its reliance on
foreign consumers (Extract 2). As a consultant economist to the Singapore government
that wants to achieve sustainable economic growth, discuss whether you would follow
his advice. [8]
[Total: 30]
Questions
(a) Explain the difference between nominal Gross Domestic Product and real Gross
Domestic Product. [2]
Nominal GDP is the total value of all final goods and services produced within the geographical
boundary of an economy over a year, [0.5m] expressed in current prices [0.5m] whereas real
GDP is the total value of the same output after taking into account inflation [1m] OR after
adjustment for price changes (i.e. inflation) [1m].
(b) To what extent can it be concluded from Tables 1 and 2 that Singapore’s economy
performed worse in 2009 than South Korea’s? [5]
 THESIS (3m):
- Case information: Tables 1 and 2 show that that Singapore’s economy performed
worse in 2009 than South Korea’s in terms of real GDP growth (-0.8% vs
0.3%).[0.5m]

18
- Analysis: This means that Singapore experienced a fall in real national output in
2009, i.e. recession, while there was still a rise, albeit a slow one, in real national
output in South Korea. [1m]
- Case information: Singapore’s unemployment rate was also higher at 5.9%

compared to South Korea’s 3.6%. [0.5m]
- Analysis: This means that there was a greater wastage of the labour resource in
Singapore in the sense that there was more labour, which could otherwise add up
to the production of goods and services, going unused. [1m]
 ANTI-THESIS (2m):
- Case information: However, Singapore performed better than Korea in terms of
smaller rise in consumer prices (0.6% vs 2.8%). [0.5m]
- Analysis: This implies a lower fall in purchasing power of real income in Singapore.
[1m] However, it is worth-noting that the inflation rate in South Korea was not as
high as it was still less than 3%. Hence, any erosion of the purchasing power of
earned income might not be significant.
- In addition, the ambiguity of the definition of the term “performance” makes arriving
at a conclusion indefinite. There is a lack of information to help form a more precise
conclusion – eg. balance of payments data, population changes to deduce per
capita GDP, Gini coefficient for income inequality, etc. For example, if South Korea
had a BOP deficit while Singapore had a BOP surplus, the BOP deficit could reflect
a fundamental weakness in the South Korean economy, which makes it lose its
international competitiveness. [0.5m]
[NOTE: Though the data were from the same source (The World Bank), there were some
inconsistencies in the information presented in the tables. Students were expected to use
whatever data they deem appropriate to reason out their conclusion pertaining to which of the
two countries performed worse. Students may also use these data inconsistencies to question
the validity of any conclusion formed. ]
Level Marks Level Descriptor

L2 3-5m  Support data from Tables 1 and 2 with relevant economic analysis
 Marks allocated depends on the soundness and rigour in analysis
L1 1-2m Merely state data from Tables 1 and 2 with little economic analysis
(c) Using Extract 3, suggest possible reasons for the difference in the growth rates between
the emerging market economies and the developed nations [4]
 [0.5m] Case evidence: “Emerging economies grew almost 3 times faster…need to speed
up spending cuts and interest rate increases as they fight inflation and overheating”
 [1.5m] Analysis: Account/ Give reasons for the differences
- Above citation suggests that the rapid growth in EMEs lies in the government’s use
of expansionary fiscal and monetary policies. When an expansionary fiscal policy is
adopted, there is a rise in government expenditure (G). When an expansionary
monetary policy is adopted, interest rates are lowered and this leads to a fall in the
cost of borrowing. Hence, there is a rise in consumption (C) and investments (I).
- Rise in G, C & I  rise in AD  raise incentive of firms to produce more due to
higher expected profits, assuming EMEs are at less than full employment 
multiplied rise in real national output
For European / Developed counterparts

 [0.5m] Case evidence: ‘developed nations contended with high unemployment and a
European debt crisis’

19
 [1.5m] Analysis: Households and firms in the developed nations become pessimistic about
future economic conditions. For example, businesses expect revenues from their
investment projects to fall. As a result, the demand for capital goods will decrease and so
will investment expenditure. The resultant fall in I will lead to a fall in AD, ceteris paribus,
leading to a multiple fall in real national output in the developed nations, which is in stark
contrast to the rise in real national output in the emerging economies.
OR
 [1.5m] Analysis: The crippling European/developed economies imply the inability of
government to initiate expansionary policies as they face financial constraints brought
about by “European debt crisis”. The latter would lead to government’s adoption of
contractionary fiscal policy which cuts government spending and raises corporate and
personal income tax rates so as to reduce the national debt. Hence the fall in G, I and C
will lead to a fall in AD or in the best case scenario, only a small rise in AD. As a result,
there is slower growth in the European/developed nations.
[Maximum 3m if there is no case evidence given.

Maximum 2.5m if students do not compare the situations in both economies.]
(d) (i) With the help of an AD/AS diagram, explain how the ‘swift government
response’ (Extract 1) helped the Asian economies to recover from the
global recession in 2009. [6]
 [0.5m] Define recession: 2 consecutive quarters of fall in real GDP/GNP or negative

economic growth.
 [0.5m] Identify elements of the ‘swift government response’ to be expansionary fiscal policy
(rise in government spending & fall in taxes) and monetary policy (cut in i/r and fall in bank
reserve requirement)
 Explain how these 2 policies work to boost the economy during a recession
i) Expansionary fiscal policy [total 2m; if only explain rise in G with example,
award max. 1m]
G on final gds/svs such as building infrastructure, spending on education and healthcare 

AD. Govt can also  taxes to AD. By  personal income tax  Yd  C  AD. Also,
corporate income tax   post-tax profits  more funds for investment  I  AD.
Diagram of effects of an expansionary FP on national output [1m]
General price level

AS
E1
P1
E0
P0 AD1
AD0
0 Y0 Y1 Real national output

20
Explain diagram:
Multiplier process [total 1m] Currently at Y0, economy is operating at less than full
employment. With G, C & I, AD curve will shift to the right from AD0 to AD1. There is now a
shortage of goods and services at original general price level P0. There will be an upward
pressure on prices. Firms will have more incentive to increase production and hire more
workers. Hence, national income increases. Consequently, this rise in incomes will lead to a
rise in induced consumption by households. The greater is the proportion of additional income
spent on consumption, the larger is the rise in induced consumption and the subsequent
increase in national income. The multiplier process continues until the economy reaches a new
equilibrium national income at a higher level, i.e. Y1.  economic growth & recovery of
emerging economies
OR
PAP [total 1m] Currently at Y0, economy is operating at less than full employment. With G,
C & I, AD curve will shift to the right from AD0 to AD1. There is now a shortage of goods and
services at original general price level P0. There will be an upward pressure on prices. Firms
will be incentivized to expand production due to higher expected profits. Hence real national
output will rise along AS curve until a new equilibrium is reached at E1. There will be a
multiplied rise real national output at Y1  economic growth & recovery of emerging
economies
ii) Expansionary monetary policy [total 1m]
Govt  money SS  I/R COB  C on consumer durables + I by firms  AD [1m] 

shortage of goods & services  P  incentive for firms to raise production  multiple  real
national output, thus economic growth
Students may comment that AS may rise too depending on the nature of the govt’s stimulus
spending OR comment that the probability of minimal time lag in decision making &
implementation added to “swiftness” of the recovery of the Asian economies

L3 5-6m  Detailed analysis of how fiscal and monetary policies help the
economies to recover
L2 3-4m  Some analysis of how fiscal and monetary policies help the economies
to recover
 Detailed explanation of how one policy helps the economies to recover:
max. 4m
L1 1-2m  Sketchy analysis of how fiscal and monetary policies help the
economies to recover
(ii) Assess the need for Asian economies to ‘unwind previous policy’ after 2010 as
mentioned in Extract 1. [5]
The expansionary policies implemented in response to the global recession in 2008 have led
to Asian economies recording healthy growth rates in 2010 (Ext 1). This was attained despite
the US and Europe not overcoming the crisis that had hit their respective economies. However,
the impact of EMEs’ growth has contributed “close to 7%” inflation in April 2011 (Ext 3) which
may have repercussions on the rest of the world – including those that have yet to (fully) recover.
THESIS (Focus on unwinding previous policy) [2m: Any 1 well-explained point below]

21
Reasons:
 Need to stop using expansionary policies as economies have already rebounded. As the
economies approach full employment, the economies would be operating at the relatively
price inelastic portion of the AS curve. Hence, any further rise in AD would bring about a
rise in the general price level, causing inflation.
 To avoid facing the debt crisis of the developed nations - expansionary FP of Asian
economies may result in unsustainable govt deficits and incur debt if govt borrows to
finance expansionary policy.
ANTI-THESIS (Need not focus on unwinding previous policy) [2m: Any 1 well-explained
point below]
 Growth is not confirmed as it still hinges on the future performance of the Asian economies
(“not necessarily translate to long term recovery”) (Ext 1). The rise in real national output
could be a short-lived one. Hence, there is a need to continue raising G or keep interest
rates low so as to stimulate AD and hence, raise real national output, especially if the
economies still have a lot of spare capacity.
 May slide back to recession due to weak growth from European and American markets
(“export-reliant Asian economies” and “prolonged patch of slow growth in the world’s largest
economy”) (Ext 1). Weak growth in the European and American markets would translate to
fall in the demand for imports, which are the exports of the Asian economies as the foreign
consumers rein in their spending. Hence, there would be a fall in the export revenue of the
Asian economies. Unless the other components in AD such as G, I and C rise, AD of the
Asian economies could fall, bringing these economies back to recession.
Conclusion
Hence whether the Asian economy needs to unwind the previous policy depends on the state
of the recovery of economic growth in the country and the health of the budget balance position
of the government.

L2 3-5m  2 sided arguments with adequate explanations and case evidence to
support 2 views.
 Well-explained one-sided argument: max. 3m
L1 1-2m  Descriptive answers with limited analysis
 Largely one-sided argument with limited explanations.
(e) The IMF chief proposes that Asia should boost domestic demand to cut its reliance on
foreign consumers (Extract 2). As a consultant economist to the Singapore government
that wants to achieve sustainable economic growth, discuss whether you would follow
his advice. [8]
Definition: Sustainable economic growth refers to a rise in real GDP without an increase in
GPL.
Direction:
 With the recession in the ‘hard-hit United States’, there is likely to be a fall in (X-M) from the
region. To combat the problem, the IMF chief suggested that ‘Asian economies themselves
have a big enough market to generate demand’. This means boosting domestic
consumption within the Asian economies which will also cause a rise in consumption of
imports in these regions. Such a measure can generate a rise in demand for S’pore exports
which can offset the fall in demand for exports from the US region.
 While such a strategy can help to boost actual growth, it might not be able to attain
sustainable economic growth and hence, the use of SSP has to be put in place.

22
P1: Singapore could attempt to boost domestic consumption internally to boost actual
growth
 By using policies such as expansionary fiscal policy, there will be a rise in government
expenditure in the form of spending of infrastructure (Ie. Building of roads, facilities). The
fall in taxes such as personal income taxes and corporate taxes will cause a rise in
disposable income and a rise in post-tax profits respectively leading to a rise in C and I.
This can increase AD which can mitigate the effects of a fall in (X-M) from the US leading
to a small rise in national income and induced consumption  further rise in national income
and induced consumption  Multiple rise national income which raises economic growth
in the short run, assuming that the Singapore economy is not operating at near full
employment.
Evaluation:
 However, if Singapore were to follow the IMF chief’s advice to boost domestic consumption
alone, it will not be effective given our small domestic market and dependence on imports.
The rise in domestic consumption will have a small expansionary effect on the country’s
real national output. In addition, since Singapore is dependent on imports, for every $1
spent, 60 cents is spent on imports, the rise in consumption will cause a large rise in imports
which causes a large withdrawal from the domestic economy. This reduces the multiplier
size and causes a smaller rise in national income from boosting domestic consumption.
Hence such a policy will not work for Singapore.
P2: Singapore should ride on the benefits of the Asian region boosting domestic
consumption to boost actual economic growth
 Extract 1/last paragraph mentioned the forecast strong growth in regional economies of
Indonesia, Malaysia, the Philippines and Thailand. From Table 1, China and India enjoyed
strong real GDP growth rates of 10.3% and 9.7% respectively. In Ext 2, the IMF chief also
mentioned that “Asian countries themselves have a big enough market to generate the
demand now”.
 If Singapore were to ride on the benefits of Asian economies boosting their respective
domestic consumption, the strong growth in the Asian economies will benefit Singapore as
consumption of imports will also rise in these emerging Asian economies which will
contribute to a rise in demand for our exports. Hence, such a growth in (X-M) from Asia
might be sufficient to offset the fall in (X-M) from the United States.
 A rise in the national incomes of the Asian economies will lead to a rise in purchasing power
in these regional countries  rise in demand for imports which translates into rise in the
demand for Singapore’s exports  rise in DD for exports revenue  rise in (X-M) of
Singapore  rise in AD  rise in national income via the multiplier process, generating
actual economic growth.
 The strong buying potential of these countries will buffer the reduced reliance on exports
to developed economies due to the latter’s fall in national income and purchasing power as
seen in their high unemployment rates (Table 2) and debt crises (Ext 1 and 3).
OR
 Case evidence: Extract 2 also mentioned increased regional cooperation and free trade
agreements.

23
 Analysis: These developments imply there would be reduced trade barriers in the region,
leading to increased trade and investment between Singapore and its regional partners.
Thus the rise in injections to the Singapore economy via the rise in export revenue and
foreign direct investment (FDI) will ultimately be beneficial to Singapore’s economic growth
too.
 On the other hand, the boosting of domestic consumption within the Asian economies might
not bring about all benefits to Singapore but costs as well. There is strong growth in the
Asian economies, for example, Malaysia, China and Hong Kong, who has progressed to
become our top 3 trading partners while US has dropped in its share of imports from
Singapore. Hence, the persistent rise in (X-M) from these strong Asian regions might cause
our economy to operate beyond full employment leading to a rise in GPL from P0 to P1 and
sustainable growth might not be attained.
General price level AS0
E1
P1
P0 E0 AD1
0 Y0 YF0 Y1 Real national output
Therefore the Singapore government also needs to raise AS to bring about sustainable
AD0 economic growth in the long run. Such a measure
economic growth, i.e. non-inflationary
will also help to improve infrastructure and facilitate trade that will rise from regional
agreements and the boost in (X-M) from the region.
Thesis:
0.5m – citation
1.5m – analysis of impact of rise in (X-M) on short-run economic growth
1m – why relying on domestic demand to achieve sustainable growth is not enough
P3: Supply-side policies can be used to achieve sustainable long term economic growth
in Singapore
E/E: Interventionist supply-side policies are to raise AS to counter the deficiencies of the
market. Government intervention can take the forms of infrastructural improvements and
human resource development.
 Infrastructural improvements include transport and communications systems, grants for
R&D to encourage innovation and entrepreneurial initiative. Singapore government has
committed a budget close to S$16 billion from 2011 to 2015 to further strengthen R&D
capabilities.
 Human resource development comprises of formal and informal education for the labour

24
force. Due to continuously changing technology and new production methods, on-the-job
training becomes important to raise productivity. The Employability Skills System (ESS)
aims to raise local workers’ employability skills level. The Ministry of Manpower has also
embarked on a 10 year Continuing Education and Training Masterplan (CET) to help
workers acquire new relevant skills demanded by emerging industries like aerospace,
precision engineering and services. To support this plan, government substantially
increased its subsidies for lifelong education and worker training.
 Overall improvements in infrastructure and quality of the workforce will raise the
economy’s productive capacity  rise in AS
General price level AS0 AS1
E0
P0
E1
P1
AD1
AD0
0 Y0 YF0 Y1 YF1 Real national output
 As the economy has reached full employment at AD1, such infrastructure improvements will
help to expand the full employment level of output in order for the country to achieve
sustainable economic growth.
 The aggregate supply curve will shift to the right from AS0 to AS1. As a result, the general
price level falls from P0 to P1 while the real national output increases from Y0 to Y1.
L: Thus economic growth is sustainable as it is achieved without overheating the economy.
There is also an increase in the full-employment level of national output (or potential growth)
from YF0 to Y F1.
 Evaluation: However, supply side policies with regard to human resource development
tend to be long term and uncertain in their outcomes. It takes time to change the mindsets
of workers and employers on the need for skills upgrading. Firms may be reluctant as there
will be loss of output during workers’ training. Firms may also underestimate its true benefits.
In most cases, interventionist supply side policies require government’s substantial funding
which drain its resources and incurs opportunity cost especially when faced with a lean
government budget.
[Note: Other points of evaluation on SS-side policy is accepted.]
2m – explanation of either interventionist or market-oriented SSP

1m – diagram of impact of rise in AS on economic growth
1m – evaluation

25
1m – Conclusion
In the short run, the Singapore government can achieve economic growth by following IMF’s
advice that essentially will bring about a rise in AD. However, more importantly, to achieve long
term sustainable economic growth, the rise in AD must occur in tandem with the rise in AS via
increases in the quantity and quality of its resources as well as technological improvements.

L3 7-8m  2 sided argument on the pros and cons of pursuing domestic demand.
High ‘A’  Excellent use of case materials to support arguments.
 Thorough application of economic analysis and good evaluation
shown.
 Good understanding of the characteristics of the Singapore economy.
L2 4-6m  2 sided argument on the pros and cons of pursuing domestic demand.
6m– ‘A’  Some use of case materials though not consistently present.
5m- ‘B’  Good application of economic analysis though some gaps in analysis
4m– ‘D’ might be evident.
 Some understanding of the characteristics of the Singapore economy.
 Lacking in evaluation.
L1 1-3m  Largely one-sided argument with limited/ inaccurate/incomplete
‘U’ grade explanations of the advice from IMF chief
 Smattering of points with many conceptual errors

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What I know about the What I want to learn, i.e.