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PJC Prelims 2010 CSQ1: Developments in the PC Industry

(a) (i) Compare the change in market shares of Worldwide PC Shipments of Dell with that of HP
from 2005 to 2008.
(2)
Difference (1)
Dell experienced a decrease in market share while HP experienced an increase in market share.
Similarity (1)
Both Dell and HPs market share increased from 2007 to 2008.

(a) (ii) With the aid of a diagram, explain the impact of the change in market share on the profits of
HP.
(6)
Increase in Dd (AR / MR shifts right) (1) More Inelastic Dd (1)
Increase in market share Dd increases
Fall in Costs (Accept movement along LRAC OR shift of MC/AC) (1)
With larger market ability to reap EOS cost decreases
Increase in profits (1) FROM P1C1BA TO P2C2ED

Price/Revenue/Cost
MC1
D

P2

P1
C1
C2

MC2

AC1
AC2

MR1

AR1

AR2
MR2
Output

(b) In view of the possible merger with Gateway, explain how size and global presence enable Acer
to compete with the two American heavyweights, Hewlett-Packard (HP) and Dell.
(4)
Cost advantage (2)

Evidence
Extract 1: it sells through retail and has put an emphasis on design and marketing
Explaining in economic terms
Marketing economies of scale: Advertising costs / Design costs can be distributed over a
larger output, reducing average costs of production.
Answering the question
Allows firm to price more competitively.
Revenue advantage (2)

Evidence
Extract 1 buying Gateway will boost Acer's presence in America
Explaining in economic terms
Presence in the US markets influences ability of the firm to influence tastes and
preferences and thus enable Acer to make consumers in the market switch to Acer
hence increasing the demand for its products and increasing its market share and
revenue.
Answering the question
Higher TR increases profits thus enabling Acer to engage in more R&D to compete more
effectively with the development of new products.

(c) Discuss whether the rise in e-waste dumping is a result of non-price competition by PC-makers
(8)

Introduction
Highlight that from Extract 3 Paragraph 1, there has been a marked annual increase in ewaste dumping.
The rise of e-waste dumping can be attributed to a number of factors apart from nonprice competition.

Explaining that PC industry engage in non-price competition


Oligopoly market concentration ratio of 5 firms ~ 50% thus firms will not raise prices as
they fear other firms will not follow and firms dont lower prices below the current mkt
price because other firms will follow and result in a price war (harms all firms involved).
Therefore they tend not to engage in price competition but rather Non price competition
(evidence Extract 2 para 1).
Thesis: The rise in e-waste dumping is a result of non-price competition.
Evidence
Extract 1 Paragraph 2 & 4, HP and Dell have been aggressively engaging in product
differentiation to improve upon the design of their machines, resulting in intense
competition between themselves and the other PC makers.
Explaining
Consumers will therefore switch between the more differentiated and updated electronic
products, leading to an increase in worldwide demand for electronic products which
accounts for the rise in e-waste dumping.
Evidence
Extract 1 Paragraph 2 and Extract 2 Paragraph 2, there has been a rise in emphasis on
how PC makers sell and market their products. For instance, HP has made use of a vast
network of retail partners to sell its laptops while Dell has also relied on Wal-Mart to
market its laptops to the public.
Explaining
This is a form of non-price competition whereby PC makers are adopting to make their
product more convenient and accessible to the public, increasing their products visibility
and exposure. This sort of marketing strategy is a form of product differentiation whereby
firms create an imaginary difference to their products, hoping to generate higher sales
revenue as demand is made more price inelastic with aggressive marketing tactics.
Non-price competition raises consumers demand for PC

Anti-thesis: The rise in e-waste dumping can be attributed to other factors apart
from non-price competition efforts by the PC makers
Evidence 1
Extract 1 Paragraph 1, emerging economies such as India and China are experiencing
an increase in income, especially for their middle classes.
Explaining in economic terms
Assuming laptops are normal goods (YED>0), with a rise in income, demand for
computers will rise. This will result in more e-waste dumping as sale of laptops rises.

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

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

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

Limitation
1. However, EMC may not be easily estimated and quantified. Overestimation of the
EMC may result in underproduction of electronic products which may lead to a loss
of welfare for the society.

Non-market based policy


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

Long term policy


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

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

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

(a)

(i)

With reference to Tables 2 and 3, compare the trend in real GDP growth for Germany
and Greece over the period 2006 to 2009.
[2]
Similarity: Both Germany and Greece experienced a fall in real GDP growth over the period
2006 to 2009.
Difference: But the real GDP growth rates for Germany declined more significantly than that of
Greece.

(ii)

How far can we conclude that Germany has a higher material standard of living than
Greece?
[4]

Thesis: We can conclude that Germany has a higher material standard of living than
Greece
As mentioned in Ext 6, The German economy grew at the most rapid rate since reunification. 1m
In addition, consumer spending has expanded and the Germans are also buying more goods
and services from other countries.
Citizens in Greece, on the other hand, may not enjoy as much goods and services. This is
because persistently high inflation is likely to erode consumer spending (Ext 8, para 5). In 1m
addition, the high unemployment rates as shown in Table 3 imply a fall in consumers ability to
purchase goods and services
There, we conclude that Germany has a higher material standard of living than Greece.

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

1m

Information on how equitable income is distributed in these two countries and the composition 1m
of GDP would be necessary before we can accurately conclude that Germany indeed has a
higher material standard of living than Greece.
(b)

(i)

Using AD-AS analysis, explain clearly how austerity and cutback policies have
aggravated the recession as stated in Extract 8.
[4]
The recession in Greece means that the Greek economy is experiencing negative growth.

1m

The austerity and cutback policies include an increase in indirect tax and a reduction in
government spending. Public sector wages and pensions are also reduced.
The cut in wages reduces consumers income which leads to a fall in consumer spending (C) 1m
(which is a component of aggregate demand).
The increase in indirect tax curtails private consumption (C) and the decrease in public
1m
consumption mean a fall in government spending (G).
With the fall in both C and G, AD falls further, aggravating the recession as GDP shrinks 1m
further.

(ii)

Explain what is meant by unemployment is a lagging indicator.

[2]

When firms confidence is very low, production will be cut back. A fall in national output and
national income lead to a fall in the demand for goods and services. With a fall in consumption,
the demand for labour falls since the demand for labour (workers) is a derived demand.
The national output first falls before we see a fall in employment, hence, unemployment is a
lagging indicator.

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

In the light of the data provided, assess the relative success of Germany and Greece in [8]
recovering from a global financial crisis.
Introduction engagement with statistics and data
The global financial crisis hit the world economies (Ext 5) in 2007 and 2008. Both Germany
and Greece experienced a negative impact on their economies as reflected by the decline
in real GDP growth rates from 2007 to 2009 (Tables 2 & 3).

The fall in Germanys economic growth was sharper than that of Greece between 2008 and
2009 (Table 2).

Thesis: Germany is relatively MORE successful in recovering from a global crisis


Germany recovered from the crisis unscathed as its economy is largely export-led (Ext 6
para 3) with exports accounting for 41% of German GDP in 2009.
In fact, Germany (which is the European Unions largest economy) is the reason for
the strongest pace of growth in the EU economy since the global financial crisis.
An improving global economy will lead to a higher demand for German exports and
a self-sustained recovery is expected for Germany. (Ext 6)

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

In addition, Greece has to deal with a severe debt crisis (Ext 8).
Greece has agreed to a three-year austerity and deficit-slashing programs together
with structural reforms in exchange for a bailout from the IMF and the EU.

Anti-thesis: Germany is relatively LESS successful in recovering from a global crisis


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

There could also be a risk of a second financial crisis with countries being insolvent and
being forced out of the Euro, and banks collapsing. (Ext 7, para 2)
Germany would also have to bear the consequences of lower exports.
France, Italy, Belgium and Spain are among the 11 largest export partners of
Germany (Ext 8, para 2) and it is clear that Germany will be affected by any
financial crisis.

Stand / Judgment / Final Evaluation


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

Knowledge, Application, Understanding and Analysis


L3 For a thorough and balanced answer to assess the relative success of Germany
and Greece in recovering from a global financial crisis.
Good reference to case material and good evaluative comments made.
L2 For an answer with an undeveloped explanation of the relative success of
Germany and Greece in recovering from a global financial crisis.
Some reference to case material. No/little evaluative comments made.
L1 For a superficial and /or one-sided answer that shows some knowledge of the
question requirements.
Very limited/no reference to case material.

(d)

7-8m

4-6 m

1-3 m

Discuss and compare the likely impact of the change in the exchange rate of the Euro [10]
on the German and Greek economies.

2006
1.26

Table 4: Average Rates of Euro/US$


2007
2008
2009
1.37
1.47
1.39
Source: European Central Bank

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

2006
1.26

Table 4: Average Rates of US$/Euro


2007
2008
2009
1.37
1.47
1.39
Source: European Central Bank

Now, this means that in 2006, 1 can buy US$1.26 and in 2009, 1 can buy US$1.39. So in
other words, the has appreciated.

Introduction
The has generally depreciated against the US$ (for the period 2008 to 2009). (Table 4).
This depreciation of the Euro will have an impact on economic growth, inflation,
unemployment and the balance of payments position (4 macroeconomic objectives) of both
the German and Greek economies.

Positive impact for Germany(Ext 7)

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

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

Given that exports are more competitive, aggregate demand (AD) increases as well
(assuming import expenditure remains unchanged). Higher economic growth may be
achieved by the German economy. With the increase in national income (which is largely
due to the rise in exports), the unemployment rate in Germany is likely to fall.

Negative impact for Germany

Due to increase in AD, the German economy will experience higher inflation rates.
Higher energy and food prices could lead to greater inflationary pressures on the German
economy given a weaker Euro.
The extent of growth in exports as a result of a depreciating Euro may be limited by the fact
that the largest export partners of Germany are in the EU.

Positive impact for Greece


In the case of the Greek economy, the depreciating Euro may mean an increase in the
number of tourists visiting Greece.
For instance, Americans will find it relatively cheaper to visit Greece than before since
the Euro has weakened against the US$.
Again, national income and employment may rise from this increase in exports.

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

Negative impact for Greece


The Greek economy may experience higher inflation rates due to the increase in AD but its
effects will not be significant due to the reasons below.

A depreciating Euro is unlikely to stimulate the Greek economy or generate employment


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

The Greek economy which is in a deep economic crisis (Ext 8) is likely to experience a
deep recession and a sharper rise in unemployment.
The economic contraction in Greece as a result of higher taxes and a fall in government
expenditure will reduce consumption. Hence, there is no growth to speak of in the case
of the Greek economy.

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

The depreciating Euro may lead to a greater lack of confidence in the currency. This would
aggravate the debt crisis which the Greek economy has to deal with.

Comparison
Both the German and Greek economies will experience higher inflation rates. However, the
impact of the depreciating Euro on the general price level is greater on the German
economy since imports grow at a faster rate compared to the Greek economy (Table 5).
Higher energy and food prices could lead to greater inflationary pressures on the
German economy given a weaker Euro.

Stand / Judgment / Final Evaluation


On the whole, the depreciating Euro would make European exports more competitive and
the Germany economy would be able to increase employment, raise wages and this may
stimulate exports from other EU countries (Ext 7), hence, increasing national income and
employment.
Mark Scheme for part (d)
Knowledge, Application, Understanding and Analysis
L3 For a competent discussion on the likely impact of a depreciation of the Euro on
the German and Greek economies.
Good reference to case material.
L2 For an answer with an undeveloped comparison of the likely impact of a
depreciation of the euro on the German and Greek economies.
Some reference to case material.

6-8 m

L1 For a superficial answer that shows some knowledge of the question


requirements.
Very limited/no reference to case material.
Evaluation
E2 Evaluative comments with justification.

1-3 m

2m

E1 Evaluative comments, unexplained.

1m

4-5 m

RI Prelims 2010 CSQ2: Gross Domestic Product and Economic Growth


a

Using the data in Table 3:


i.

Identify: GDP at 2005 market prices DO NOT change to real GDP


Explain: Effects of inflation are removed or eliminated.

AVOID takes into account inflation as its ambiguous in Cambridge markers opinion
To score the second mark, students must show their understanding of / explain real
Mere statement that GDP at 2005 prices is real GDP without explanation

ii.

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

Summarize the trend in Singapores economic growth rate from 2006 to 2009.
Decreasing growth rate (overall trend)
Reaching negative 1.3% in 2009 / recession in 2009 (refinement)

Comment on the success of Singapores stated goal to remake itself as a high valueadded, high tech growth hub for manufacturing from 2006 to 2008.

[2]
1m
1m

[2]
1m
1m

[4]

2m
Thesis: Singapore has been able to achieve the stated goal of remaking herself as a
value-added, high tech growth hub for manufacturing
Fig 1: re-exports re-exports have been increasing from 2006 to 2008. If we assume that her
re-exports consist of high value-added, tech products which the manufacturing industry has
transformed from imported raw material and intermediate goods like crude oil to refined
petroleum products, imported industrial parts into telecoms equipment etc, then the stated
is achieved.
Ext 4: continue to attract high-quality investment suggesting

Anti-thesis: Goal has not been achieved


Fig 1: question type of re-exports; in this case goal not achieved if re-exports are just those 2m
under entreport trade
Table 3: Trend of falling contribution to GDP by the manufacturing sector
Table 3: Fall in labour productivity makes the goal of high tech hub questionable as
greater technology and capital deepening should have contributed to increase in labour
productivity

Evaluative comment
More data needed (e.g. type of manufacturing activities, value-added by various
manufacturing industries) before any conclusion can be made about whether stated goal
achieved.
Slowdown in growth may not have been due to failure of manufacturing sector but other
factors like the global recession which affected all countries.
Note: 2m for thesis, 2m for anti-thesis. No conclusion: max 3m.
No reference to case material: max 2m; Limited scope: max 2m.

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

With the help of a diagram, suggest two reasons to account for Singapores growth rate in
2009.

[6]

Recession in 2009 as result of decline in AD & AS


Fall in AD
2m
Ext 7: Decline in global demand due to global recession (falling incomes of trading partners)
Table 3: Appreciation of S$ led to loss in export price competitiveness
Effect: Fall in X (trade surplus fell), leading to a fall in AD, fall in real national income via
multiplier.
Diagrammatically, there is a leftward shift of the AD curve
Fall in AS:
Table 3: Falling labour productivity implies rising unit cost of production in the short run
Effect: Fall in AS, fall in real national income
Diagrammatically, there is a leftward shift of the AS curve

2m

AD/AS diagram (1m each for the correct shift in AD & AS)

2m

If the 2 reasons are either AD or AS: max 2m


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

To what extent might reducing reliance on foreign labour help to improve labour productivity
and sustain economic growth?

[6]

Define:
Labour productivity: the quantity of output per unit of labour (i.e man-hour)
Sustained economic growth: both short run (actual) and long run (potential) growth
Thesis: May improve productivity & sustain economic growth
Foreign workers are used due to the relatively lower wage paid to such workers. Ceteris paribus,
theres little incentive to engage in capital deepening (cheaper to employ more foreign workers than
buying capital equipment) nor sending them for training on contractual term (too short a time frame
to recoup cost of training)
Ext 6: employers opt for the easy way out hiring more foreign workers instead of boosting labour
productivity

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

As it cost more to employ foreign workers, there is greater incentive to improve productivity of local
workers to bring down or keep the unit labour cost constant.
Ext 5: firms will get more out of fewer workers. This can be done via training & education and increase
capital deepening.
With higher productivity and increased productive capacity, AS shifts down and right allowing for both
actual and potential growth to be realized. Also any increase in AD can be absorbed so as to dampen
inflationary pressures
Anti-thesis: May not increase productivity & Economic Growth
Ext 5 & 6: reducing reliance on foreign workers may lead to increase in cost of production, especially
for the construction and marine sectors as locals shun jobs in these sectors. The cost of using foreign
workers will rise as locals shun jobs in these sectors. The cost of using foreign workers will rise as
firms are unable to substitute local labour or machines for the foreign workers.

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

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

Evaluation / Synthesis:
The links between foreign workers, productivity and economic growth is not so simple. Even if
supply of foreign workers is reduced in Singapore, this may not result in higher productivity of local
workers and growth.
Ext 4: Japan does not rely on foreign workers, has high productivity in most industries and yet has
low or stagnant growth.
Thus, the policy of increasing the foreign worker levy needs to be adopted at a gradual pace to
allow firms to adjust to the higher levy.
If the governments objective is to sustain a 7-8% growth rate, such a policy is not viable given our
declining workforce.

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

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


to one that looks to the domestic market.

[10]

Clarify key terms:


Better? For whom? - Consider small open economy like Singapore vs a big economy like China

Explain the term intensification of globalization in Asia (found in Ext 8)


Maintain exports as a key driver of growth
Look to opening up of Asian markets for both export and import to propel the burgeoning region
forward i.e deeper regional economic integration
Target goal: sustained economic growth: both short run (actual) and long-run (potential) growth.
Thesis: Intensification of globalization in Asia is a better growth model:
Growth due to potential Asian export market
The significant growth of China and India presents provides a potential large market for other Asian
countries exports
Ext 9: potentially large demand in China and India, three (including Japan) of the worlds four largest
economies will be located there
This will provide Asian countries with:
Opportunities to continue to practice specialization on a world-wide scale based on Theory of
Comparative Advantage: economies of large scale production can be enjoyed, hence more efficient
use of resources
Greater incentive to stay competitive, could possibly lead to higher domestic investment, leads to
growth of domestic firms can counter dipping share of contribution from local companies to
growth figures (Ext 7).
Opportunities to have deeper integration in Asia possibly make it easier for local companies to
venture into the other Asias markets and established themselves. This is beneficial as profits
would be repatriated back to Singapore and circulated within the economy.

Growth due to potential Asian import market


With globalization, there are greater opportunities for more input flows within the region. This will
benefit small and resource scarce countries like Singapore who need components, raw material
and foreign labour for growth
Even big economies like China and India should consider also opening up their own markets and
start buying more imports from other countries in Asia. This generates revenue and growth for
these countries who are selling to China and India, in turn leads to increase demand for exports
from China and India.
Hence focus of intensification of globalization in Asia is about turning to Asia: pick up slack in
external demand from the North American & European economies and growth and at the same
time also buying more imports from Asian partners to reap potential mutual benefits. (Ext 8)
Evaluation: However, depending on Asian markets may not lead to growth.
The Asian markets may not have the buying power of the Western markets.
The Asian economies may not have the high tech inputs (skilled labour and level of technology
embodied in capital equipment) that the West has.
Export-led growth may put more inflationary pressure on wage and other costs if the country is
near full employment. This again highlights the importance of productivity improvement especially
in the case of Singapore. With a small population, there is a limit to the number of people available
to enter the workforce (Ext 5) and hence potential growth.

Anti-thesis: Pure focus on domestic market to propel growth is a better model

Domestic market can take up the slack in trade of goods. (AD increases) especially for big
economies like China given the huge population size and hence consumption base to fall back on.
Demand from Europe and North America slowing down.
Ext 8: 1% growth for Germany and other Euro zone countries and United States 3.3% growth this
year whereas Asia is expected to grow by 7.5%

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

Domestic market is more stable:


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

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

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

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


Small economies like Singapore: focusing purely on domestic markets not an option as domestic
market is too small to sustain growth. Moreover, from Ext 7, domestic consumption has been falling
and is low (<40% of GDP) due to lower wages and increases in financial liabilities
Such a model perhaps more suited for large economies, like China, which have huge domestic
markets to rely on.
Stand / Judgment / Final Evaluation: Intensification of Globalization is better
Short sighted move to focus on domestic market even though Asia is expected to expand by 7.5
per cent this year. Question is: can such a rate be sustained and for how long?
Instead of solely looking to the domestic market, the region could seize the opportunity to develop
their domestic market as an additional or twin driver of growth that could help to mitigate falls in
external demand from US and Europe to ensure sustained and stable growth. (Ext 8)
There is much to gain from intensification of globalization e.g technological transfer through FDIs,
greater incentive to stay competitive through R&D or cost reduction and other gains in line with the
theory of comparative advantage.

Note: It is not necessary for students to cover all 3 aspects of globalization as there is no supporting case
material for all 3 areas (e.g labour flows). However, students must include i) trade and ii) FDIs in
their discussion.

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