Theme 3: The National and

International Economy
9732 Nov 2009 Paper 1 Question 2
9732 Nov 2009 P1/Q2
Part (a)
Compare the change in China’s balance on current account between 2003 and 2006
with that of the US over the same period. [2]

Question Analysis:
1m for each valid comparative statement relating to the change in current account
balance of the two countries.
Suggested Answer:
Increasing surplus (improvement) for China and increasing deficit (worsening) for
the US. Larger magnitude of change (in percentage terms) for China than the US.
9732 Nov 2009 P1/Q2
Part (b)
State how China’s current account on the balance
of payments will be affected in the future by:
i) increasing overseas investment, [1]
ii) sending 351 000 people to work overseas. [1]
Question Analysis:
Candidates are expected to explain the impact of
the two events in terms of how the outflows &
inflows of currency in the future may impact
China’s current account.
9732 Nov 2009 P1/Q2
Part (b)
State how China’s current account on the balance of payments will be affected in
the future by:
i) increasing overseas investment, [1]
ii) sending 351 000 people to work overseas. [1]
Suggested Answer:
i) Repatriation of profits that will add to the primary income balance.
ii) Remittances of earnings through providing labour services that will add to the
secondary income balance.
9732 Nov 2009 P1/Q2
Part (c)
Explain a likely advantage to Chinese firms of buying competitor firms overseas. [2]

Question Analysis:
Possible advantages may include increased share of the global market, access to
technology or raw materials, cost savings/advantages (economies of scale and/or
scope) arising from a larger scale of production, increased market power/ability to
set prices etc.
9732 Nov 2009 P1/Q2
Part (d)
Comment on the likely size of the multiplier in the three economies shown in Table
3. [6]

Question Analysis:
Candidates are expected to demonstrate understanding of the multiplier process in
terms of how much is passed on in the circular flow to create increased incomes
(and induced spending) as well as what determines the size of the multiplier
(marginal propensities to withdraw). There should be an explanation of the
structure of the three economies (e.g. openness) with reference to consumption
and imports as a percentage of total expenditure.
 9732 Nov 2009 P1/Q2
Part (d)
Comment on the likely size of the multiplier in the three economies shown in Table 3.
[6]
- Define the multiplier and explain what determines its size
- Given that the Singapore economy is highly import-dependent (import to GDP
ratio being 224%) in comparison with China and the US, any increase in
autonomous spending would have a very high degree of leakage from the circular
flow. As such the multiplier value is likely to be smaller than that of the US and
China, which are much more closed economies.
- On the other hand, the US economy is driven by domestic consumption in
contrast with China and Singapore. Any increase in autonomous spending would
have a smaller degree of leakage from the circular flow since most of the income
created will be reinjected as induced spending. As such the multiplier value is
likely to be bigger than that of China and Singapore, both of which have a smaller
consumption base domestically.
- Candidates should also consider if the information in the table may be insufficient
to arrive at an accurate estimate of the multiplier size, since figures are presented
in average (% of GDP) rather than marginal terms (APC vs MPC and APM vs MPM)
and figures of marginal propensities to tax and save are not available. In
Singapore’s case, there is a significant amount of import content in its private
consumption and export revenue, which makes it less accurate to predict the
value of the multiplier using the data.
9732 Nov 2009 P1/Q2

Part (e)
Discuss how current and future living standards are
affected by the composition of national incomes in
terms of the expenditure components as shown in
Table 1. [8]

Question Analysis:
• Candidates are expected to explain how the
composition of GDP by expenditure (AD) – (what
makes up the spending on domestic output of an
economy) – may impact both current and future
living standards.
• Areas of discussion should include the investment-
consumption trade-off, relevance of government
spending and net exports to living standards
Composition of GDP by Output

Source: Singapore in Figures 2017, Department of Statistics

Composition of GDP by Expenditure

Source: Singapore in Figures 2017, Department of Statistics Source: GDP 2018 at current prices Singapore
https://www.singstat.gov.sg/modules/infographics/economy
 Compensation of Employee:

Composition of GDP by Income

Total remuneration payable by an enterprise to an
employee in return for work done. It can be paid in
cash or in kind. Examples include basic wage,
bonuses, welfare benefits and employers' CPF
contributions.
Gross Operating Surplus:
The surplus accruing to owners from production before deducting any explicit or implicit
interest charges, rent or other property incomes payable on the financial assets, land and
other natural resources required to carry on the production.

Source: Singapore in Figures 2017, Department of Statistics Source: GDP 2018 at current prices Singapore
https://www.singstat.gov.sg/modules/infographics/economy
9732 Nov 2009 P1/Q2
Part (e)
Discuss how current and future living standards are affected by the composition of
national incomes in terms of the expenditure components as shown in Table 1. [8]

Suggested Answers:
• Explain SOL in terms of material and non-material well-being
• Areas of analysis include
• How the composition of GDP of consumption spending, investment spending, government
spending and net export spending may determine both current and future SOL
• Relevance of the consumption and investment trade-off to current and future SOL
• Impact of the composition of government spending on SOL (including future SOL)
• Impact of the composition of net exports spending on current SOL
• Reference to data in Table 1 to support/substantiate the analysis
9732 Nov 2009 P1/Q2
• Areas of analysis include
• How the composition of GDP of consumption spending, investment spending,
government spending and net export spending may determine both current
and future SOL
• Relevance of the consumption and investment trade-off to current and
future SOL
- Investment spending involves the acquisition of capital goods that entails forgone alternatives, since
resources are diverted from other uses (the production of consumption goods that satisfy immediate needs
and wants).
- Investment comprises spending on physical, natural and human capital.
- Investment makes possible through capital formation the expansion of a country’s productive capacity or
capabilities in the long run.

The composition of GDP of investment vs consumption spending thus determines the trade-off that
exists between present choices (current SOL) and future growth possibilities (future SOL)
9732 Nov 2009 P1/Q2
• Areas of analysis include
• How the composition of consumption spending, investment spending, government spending
and net export spending may determine both current and future SOL
• Relevance of the consumption and investment trade-off to current and future SOL
The composition of investment vs consumption spending thus determines the trade-off that
exists between present choices (current SOL) and future growth possibilities (future SOL)

- Two ways to explain how current and future SOL may be affected:
- Present consumption needs to be sacrificed in order to make investments that will allow a country to
experience a greater increase in future production possibilities (larger improvement in future SOL).
- Conversely an increase in present consumption will involve the opportunity cost of building capital that
results in a smaller increase in future production possibilities (smaller improvement in SOL).
- Reference to the case of China, Singapore and the US. What observations can you make?
9732 Nov 2009 P1/Q2
Part (e)
Discuss how current and future living standards are affected by the composition of
national incomes in terms of the expenditure components as shown in Table 1. [8]

Suggested Answers:
• Evaluative comments may be to consider
• How far there may be a connect (or disconnect) between the expenditure components and
SOL?
• To what extent will the investment-consumption trade-off or the composition of government
spending impact future SOL?
9732 Nov 2009 P1/Q2
- Investment spending involves the acquisition of capital goods that entails forgone alternatives, since resources are
diverted from other uses (the production of consumption goods that satisfy immediate needs and wants).
- Investment comprises spending on physical, natural and human capital.
- Investment makes possible through capital formation the expansion of a country’s productive capacity or capabilities in
the long run.
- The composition of investment vs consumption spending thus determines the trade-off that exists between present
choices (current SOL) and future growth possibilities (future SOL)
- Present consumption needs to be sacrificed in order to make investments that will allow a country to experience a greater
increase in future production possibilities (larger improvement in future SOL). Conversely an increase in present
consumption will involve the opportunity cost of building capital that results in a smaller increase in future production
possibilities (smaller improvement in SOL).
- Reference to the case of China, Singapore and the US.

- Evaluative Comments:
The extent to which the composition of investment vs consumption spending may affect future SOL and current SOL depends
on
9732 Nov 2009 P1/Q2
- Evaluative Comments:
The extent to which the composition of investment vs consumption spending may
affect future SOL and current SOL depends on
- whether a country (government) is able to achieve an optimal balance between
how consumption and investment spending is allocated such that it may be
possible to achieve the largest possible improvement in future SOL without
having to make a huge sacrifice on current SOL.
- how substantial the returns on investment spending may be, particularly in terms
of how there may be sustained improvements in human development – people
and their capabilities as the ultimate criteria of living standards.
- level of income in a country (contrast low income economies with high income
economies)
9732 Nov 2009 P1/Q2
Part (f)
With reference to the data where appropriate, assess whether on balance the
Singapore economy would benefit from a large increase in investment from China.
[10]

Question Analysis:
Candidates are expected to explain possible advantages and disadvantages arising
from the influx of investment spending from China in terms of how Singapore’s
macroeconomic performance (in areas to do with economic growth,
unemployment, inflation, BOP position productivity growth) may be impacted,
with reference to data in the case materials and consider how the advantages
weigh up against the disadvantages in arriving at a reasoned
judgement/conclusion.
9732 Nov 2009 P1/Q2
Part (f)
With reference to the data where appropriate, assess whether on balance the Singapore
economy would benefit from a large increase in investment from China. [10]

Suggested Answer Outline:

Possible benefits may include:
- Impact on increased investment on AD and real GDP in the short-run.
- Creation of employment opportunities.
- Inflow of investments will add to the direct investment component of the capital and
financial account (to finance deficit in current account) and improve Singapore’s BOP
position.
- Impact on exchange rate
- Long-term benefits of investment to do with an increase in the productive capacity of the
economy (via a larger capital stock, infrastructure, and transfer of skills and technology).
9732 Nov 2009 P1/Q2
Part (f)
With reference to the data where appropriate, assess whether on balance the Singapore
economy would benefit from a large increase in investment from China. [10]

Suggested Answer Outline:

Possible costs may include:
- Possibility of demand-pull inflation, given the large increase in investment spending.
- Employment opportunities may benefit only high-skilled workers at the expense of low
skilled ones  worsen income distribution.
- Prevent or hinder the development of home-grown industries.
- Repatriation of profits (from investments) in the long-run might worsen Singapore’s
current account / exchange rate
9732 Nov 2009 P1/Q2
Part (f)
With reference to the data where appropriate, assess whether on balance the
Singapore economy would benefit from a large increase in investment from China.
[10]
Suggested Answer Outline:
Evaluative comments:
- Consider the following in arriving at a reasoned judgement of the ‘on balance’
impact.
9732 Nov 2009 P1/Q2
Part (f)
With reference to the data where appropriate, assess whether on balance the Singapore
economy would benefit from a large increase in investment from China. [10]

Suggested Answer Outline:

Evaluative comments:
- Consider the following in arriving at a reasoned judgement of the ‘on balance’ impact.
- Likelihood of inflation?
- Significance of Chinese investment in areas where Singapore lacks expertise and cutting-edge
technology?
- Overall impact on BOP position?
- To what extent will the benefits of the investment be evenly distributed?
- To what extent that the investments undertaken are aligned with the developmental needs (e.g.
productivity growth) of Singapore?
- Possibility of increased reliance on foreign investment and its implications (adding to the
vulnerability of Singapore given its dependence on trade)?