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OECD Report on China,

Brazil and the Russian


Federation
N2007 Case Study
Question

With reference to the data where appropriate, explain the
factors that might have caused the projected changes in
Brazils current account balance shown in Table 2 (6)
Identify position of CA balance: ________
Projected changes: ___________
Factors (link to factors affecting trade):
Rise in incomes in Brazil (E2 & T2: ____________________)
- link to which component in CA?
- what could affect the extent of worsening of CA?
Appreciation of Brazils exchange rate (E2)
- condition to use
Depreciation of Chinas currency (E1) suggested that China is a
major destination for Brazils exports (E2)
Brazils rate of inflation relative to other countries rate of inflation
(eg Russia)

With reference to the data where appropriate, explain the
factors that might have caused the projected changes in
Brazils current account balance shown in Table 2 (6)
Identify position of CA balance: surplus
Projected changes: decline
Factors (link to factors affecting trade):
Rise in incomes in Brazil (E2 & T2: positive growth rate)
- increase DDm c.p BOT worsens c.p CA worsens
- Extent to which CA worsens depends on YEDm higher YED
greater increase in DDm greater worsening of BOT & CA
Appreciation of Brazils exchange rate (E2)
- condition to use (ML condition: Ex + Em >1)
- Px in foreign currency dearer, Pm in domestic currency cheaper
- ML condition satisfied BOT worsens c.p CA worsens

With reference to the data where appropriate, explain the
factors that might have caused the projected changes in
Brazils current account balance shown in Table 2 (6)
Depreciation of Chinas currency (E1)
- E2 suggests China is a major destination for Brazils exports
- P of Brazils X in Chinese currency more expensive now
DDx by China BOT worsens c.p CA worsens
Brazils rate of inflation relative to other countries rate of inflation
(eg Russia)

Discuss whether the data provided are sufficient to assess
changes in SOL in these economies over the period. (8)
Clarify what is meant by SOL
mat (indicator:_________________) and
non mat
Thesis:
Annual rate of growth in real GDP positive in all 3 economies
- Explain how higher Y is linked to higher mat and non mat SOL
Higher Y higher ability to buy and hence consume more
goods & services higher mat SOL
Higher Y ability to achieve improvements in non mat SOL
Discuss whether the data provided are sufficient to assess
changes in SOL in these economies over the period. (8)
Antithesis:
Changes in mat SOL
- Pop growth rates
- Changes in Gini coefficient worsening of Y distribution?
- Governments budget balance deficit for both China and Brazil
More info on expenditure items needed productive or non
productive purposes? Promote welfare directly or smaller higher
Y group
Changes in non mat SOL
- Pollution index: changes in pollution levels
- changes in amount of leisure time available
Conclusion
- Necc but insuff indicators to make a holistic
judgement wrt SOL of these countries over time
Discuss and compare the likely impact of an unexpected
decline in world economic activity on any two of these
economies (10)
Introduction:
Clarify what is meant unexpected decline in world activity
Clarify the yardsticks that will be used to assess the likely impact on
these economies
Clarify the 2 economies under analysis
Body:
Unexpected fall in world economic activity fall in global incomes
Impact on _______________
Impact on _______________
Impact on _______________
Impact on _______________
Discuss and compare the likely impact of an unexpected
decline in world economic activity on any two of these
economies (10)
Body:
Economic framework
Unexpected fall in world economic activity fall in global incomes
Impact on BOT, FDI and hence BOP
- X falls as other countries reduce amount demanded of their M
BOT and hence CA worsens cp
- FDI fall due to growing pessimism and uncertainty among investors
KA worsens
- BOP worsens
Impact on NY
- Fall in X and FDI fall in AD more than proportionate fall in
NY cp (multiplier process)
Impact on unemployment (DDL is a derived dd fall in AD fall
in DDL increased Un)
Impact on inflation (dampen inflationary pressures)
Discuss and compare the likely impact of an unexpected
decline in world economic activity on any two of these
economies (10)
Body:
Apply to selected 2 countries
China and Brazil which of these 2 countries will be less adversely
affected
- China? Why? (make use of relevant evidence)

- Brazil? Why? (make use of relevant evidence)

More information required as extent of impact also depends on other
factors like:
- _____________________
Conclusion

Discuss and compare the likely impact of an unexpected
decline in world economic activity on any two of these
economies (10)
Body:
Apply to selected 2 countries
China and Brazil which of these 2 countries will be less adversely
affected
- China? Why? (make use of relevant evidence)
Depreciation of yuan (E1) help offset impact upon X
- Brazil? Why? (make use of relevant evidence)
Less reliant on international trade
E2 strong consumer dd in home market help cushion fall in AD & hence NY
T2 CA balance <1% of GDP even at its peak in 2004. Chinas on the other
hand >4% of GDP much higher than Brazil
More information required as extent of impact also depends on other
factors like:
- size of multiplier larger k greater fall in NY for a given fall in X
Conclusion: make a stand and explain

Discuss and compare the likely impact of an unexpected
decline in world economic activity on any two of these
economies (10)
Sample:
The Russian Federation might be most badly hit as E3 suggests that its
domestic dd as well as external dd is very weak due to the absence of
steps to restore shaken business confidence. In addition, its CA
balance as a % of GDP is significantly higher than the other 2
economies. This indicates a strong reliability on IT among the 3
countries, making it the most vulnerable to a decline in world activity.

HOWEVER, the Russian Federation is exporting commodities like
hydrocarbons and metals and oil. DD for these X might be relatively
income inelastic impact on Russians X and hence on its NY and Un
might not be as adverse as predicted.
Identify the trade positions of Singapore and Indonesia in
2008 decrease in CA surplus for both countries
Singapore less worrying trade position relatively
healthy
Thesis: Appropriateness of expenditure reducing policies
Anti-thesis: Expenditure reducing policies not appropriate
Synthesis:
Does not address root cause of problem
Suggest alternative policies

Thesis: Appropriateness of expenditure reducing policies
Explain what expenditure reducing policies are contractionary FP /
MP
FP reduce G / increase T AD NY ddm TEm cp
BOT improves
MP increase i/r C / I AD & hence NY .
Anti-thesis: Expenditure reducing policies not appropriate
will tend to reduce rate of economic growth / usually used for
overheating economies
evidence to show that economic conditions do not allow for further fall
in economic growth
Table 1 Spores growth rate (USD) fell from 13.6% (07) to 7.7% (08)
Extract 4 forecast to be in recession (09) falling GDP (-6% to -9%)
Table 1 Indonesia recession (08) -ve GDP growth rate 3.2%

Synthesis:
Expd reducing policy does not address root cause of problem
need to identify cause of fall in CA surplus
Indonesia
subsidies on imported oil TEm
reduction in subsidies inflation Px affect BOT (Extract 3)
Singapore
global fall in ddx (Extract 4)
appreciation of S$ affects export price competitiveness
fall in labour productivity (T1)
Suggest alternative policies
SS side measures improve X competitiveness (esp for Indonesia)
0% appreciation of SGD (E4) + SS side + cost cutting measures (esp
Spore falling TRx and rising world commodity prices)

Identify current problem
How policies suggested in the question work to solve the
unemployment
Fiscal stimulus: used in Asia (Extract 5)
Protectionist measures: US adopting Buy American; Russia
imposed taxes on imported cars; Indonesias tariffs on steel
(Extract 6)
Identify current problem: Un caused by global
recession
How policies suggested in the question work to solve the
unemployment
Fiscal stimulus: used in Asia (Extract 3)
G c.p AD NY unemployment rate (DDL is a derived DD)
Protectionist measures: US adopting Buy American; Russia
imposed taxes on imported cars; Indonesias tariffs on steel
(Extract 4)
US C on domestic goods keeps jobs at home
Tariffs protects inefficient domestic firms workers get to keep jobs
C (switch away from M) AD NY ..
Compare usefulness of policies
Both can lead to job creation / reduce job losses in SR
Fiscal stimulus useful
Esp when G is large (E3) greater increase in Asia than other
countries fiscal package >4% of GDP; 2X larger than US stimulus
Availability of unemployed resources hence less likely to cause
overheating (E3 recession in Asian economies; T1 Msias high Un
rate; E2 Spores ve growth forecast)
G spent on infrastructure raises productivity capacity AS; more
jobs; dampens inflationary pressure; induces C and I
Possibly larger multiplier effect (tax cuts or cash handouts likely to be
spent than saved high MPC / but E3 low rate of C and borrowing as
counter argument; implies smaller MPC)
Fiscal stimulus not useful
Economies more dependent on X G as an interim measure at best
(E3)
Compare usefulness of policies
Protectionist measures useful
ST measure in saving jobs in targeted industries
Complemented with LT SS side measures raise productive capacity
Used when inefficient firms are able to dev EOS compete
Protectionist measure not useful
If imposed on important inputs (E6 steel) COP of other related
industries price competitiveness of X TRx more Un (E4)
May cause trading partners to slide & hence affects their ability to buy
retaliation Un especially in X sector (E4 mirror image trade
restrictions)
Indonesia not likely to have CA in steel pdn (foreign steel made from
more advanced technology and is cheaper) short sightedness
better off creating jobs by developing or focusing on areas of CA
Compare usefulness of policies
Other acceptable ideas
Size of domestic market must be large enough to be a substitute to
world market save jobs (Indonesia larger domestic market than
Spore, less dependent on trade CA ration of GDP lower)
Fiscal stimulus direct injection into circular flow; protectionist measures
depend on other factors like PED of M
However fiscal stimulus depends on govts ability to finance spending
Conclusion
Both can reduce Un in SR
Use of G has SS side effects (retraining) AS more jobs in
LR; induce price competitiveness X
Protectionism perpetuates ineff; more job loses in LR (contrast with
eff and EOS from free trade and specializn based on CA)