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ANDERSON SERANGOON JUNIOR COLLEGE

JC2 PRELIMINARY EXAMINATION
Higher 1

ECONOMICS 8823/01

Paper 1 31 August 2021

Additional Materials: Answer Booklet 3 hours

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Answer all questions.

The number of marks is given in brackets [ ] at the end of each question or part question.

Name: ________________________________

Class: 21 / _____

This document consists of 9 printed pages and 3 blank page(s).

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Answer all questions

Question 1: Managing the Air Travel Market

Figure 1: Vietnam air traffic volume, 2015 – 2019

*domestic pax refers to number of passengers on domestic flights, international pax refers to number
of passengers on international flights, in millions

Source: Hanoitimes, 1 November 2019

Extract 1: Why Does Vietnam Have So Many Start Up Airlines?

Prior to COVID-19 bringing the aviation industry to a halt, Vietnam’s aviation market was on the rise.
The country had seen 20% growth over the past five years; growth that new start-ups were looking to
capitalise on. The Vietnamese domestic market is lucrative and includes the Hanoi to Ho Chi Minh
City route, the fourth-busiest domestic route in the world.

Vietnam itself is also very much on the up. The nation’s GDP has gone up by a whopping 225% over
the past decade, and Vietnam continues to be one of the world’s fastest-growing economies. The
aviation market in the country is growing for several reasons, including higher tourism levels, which
necessitates more carriers to cope with demand. Additionally, restrictive foreign investment
regulations make foreign entries into the Vietnamese air market unfeasible.

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The aviation market in Vietnam is dominated by two airlines – Vietnam Airlines and VietJet – which
make up a 75% share of the market. However, with high growth on the horizon and clear room for
competition, new airlines have emerged. Vietravel is one such recent addition. The company is one of
Asia’s leading travel operators and is now trying its hand at aviation. The carrier received its license
before the COVID-19 pandemic but may be waiting a long time before acquiring a flight permit.

Source: Simple Flying, December 2020

Extract 2: Vietnam Airlines wants caps removed on domestic ticket prices

National flag carrier Vietnam Airlines has proposed that price caps on domestic air tickets be removed
to allow carriers more pricing flexibility. The current price ceiling makes it difficult for airlines to
diversify their prices, increase profits during certain periods of time like peak seasons, and in turn
lower prices on some routes, Le Hong Ha, Deputy General Director of Vietnam Airlines, said at a
tourism forum.

Vietnam should abolish the domestic price ceiling, and allow market forces to decide prices. "The
aviation market is already operating like a free market, so airlines should be allowed to freely adjust
prices based on supply and demand," Ha said.

The Civil Aviation Authority of Vietnam (CAAV) supports the proposal, as Vietnam is one of the few
countries in the world still having a price cap, said Vo Huy Cuong, deputy head of the authority. The
CAAV has proposed removal of the price cap every time amendments or supplements are made to
the Civil Aviation Law. However, these were not approved because the National Assembly felt it was
necessary to protect the interest of many classes of civilians travelling by air, he said. If this regulation
is not amended, airlines will focus on operating and developing international routes rather than
domestic ones, he added. In mid-2018, many airlines requested the government to raise domestic
price caps because they were losing money on many routes after cost of fuel and labor increased, but
this was not approved either. Currently, air tickets on routes under 500 km operated to promote socio-
economic development have a maximum price of VND1.6 million (US$69).

Source: VN Express International, December 2019

Extract 3: The Growth in Greenhouse Gas Emissions from Commercial Aviation

While our collective use of automobiles, our production of electricity, and the industrial and agricultural
sectors each exceed the climate change impact of commercial aviation, passenger air travel is
producing the highest and fastest growth of individual emissions, despite a significant improvement in
efficiency of aircraft and flight operations over the last 60 years.

CO2 is the largest component of aircraft emissions, accounting for approximately 70% of the exhaust.
The gas mixes in the atmosphere with the same direct warming effect that occurs when it is emitted
from other fossil fuel combustion sources. The Environmental Protection Agency issued a Finding in
August of 2016 that aircraft greenhouse gas emissions “cause or contribute to air pollution that may
reasonably be anticipated to endanger public health and welfare.” The growth of demand for
passenger and freight traffic is a central barrier to controlling commercial aviation emissions.

Source: Environmental and Energy Study Institute, October 2019

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Extract 4: There are Now Nine Countries asking for an EU aviation carbon tax

The Ministers of Finance of The Netherlands, Germany, France, Sweden, Italy, Belgium,
Luxembourg, Denmark and Bulgaria want a tax to neutralise the environmental damages of aviation.
Although air travel is the source of around 2.5% of global CO2 emissions, flying is considered under-
priced in comparison with other forms of transportation.

“The initiative for a European aviation tax is a very welcome first step towards correcting this
problem,” said Gilles Dufrasne, policy officer at international NGO Carbon Market Watch. “It has been
estimated that a carbon price of US$40-80/tCO2e is needed today, and US$50-100/tCO2e by 2030 to
help us reach the Paris Agreement climate goals. However, it must also be noted that a carbon price
alone is unlikely to be a sufficient incentive to decarbonise the aviation sector.”

The Netherlands did not suggest preferred form for the European aviation tax, but the government
worked out a proposal for a national aviation tax. Companies can decide for themselves if they would
like to pass this on to their customers. Prior to this, the Netherlands imposed a similar tax in 2008,
which was dropped a year later as passengers began using airports in Belgium and Germany instead.

A spokesperson from Lufthansa Airlines based in Germany suggested other ways to avoid dangerous
emissions, such as more investments in carbon-neutral fuels: “Sustainability has been part of
Lufthansa's DNA for 25 years. Our central task for the future is to make air traffic CO₂ cleaner. For
this to succeed, everyone must assume their responsibility. The German answer to the question of
climate protection in the future must be technology and innovation, not national bans or price
increases.”

A report from the independent research and consultancy organization CE Delft shows that tax
exemptions for the aviation sector lead to higher passenger demand, aviation sector growth (in terms
of both jobs and value added) and more flights. The report also shows that a tax could result in a 10%
increase in average ticket price and an 11% decline in passenger demand. This will cause carbon
emissions to decrease by 11% and the number of people affected by airport noise to fall by 8%.

Source: Forbes, November 2019

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Questions

(a) With reference to Figure 1, compare the growth in Vietnam’s domestic passenger air traffic
volume with the growth in international passenger air traffic volume. [3]

(b) With reference to Extract 1, and using a demand and supply diagram, account for the change
in Vietnam’s total air traffic volume and comment whether this trend is likely to persist in the
future.
[7]

(c) With the aid of a productive possibility curve, explain one impact of increasing investment into
airport infrastructure on the economy of Vietnam. [3]

(d) With reference to Extract 2,

(i) State and explain, from an airline’s point of view, the relationship that exists between
domestic flights and international flights. [3]

(ii) Discuss the desirability of implementing a price ceiling for domestic flights in Vietnam.
[9]

(e) Using the concepts of price elasticity of demand and price elasticity of supply, with the aid of a
diagram, explain why consumers rather than producers bear more burden of a tax imposed on
air travel. [5]

(f) Explain how negative externalities may lead to market failure in the market for air travel. [5]

(g) Extract 4 mentions ‘aviation taxes’ and the use of ‘technology and innovation’ to address the
market failure in the market for air travel.

Discuss whether on balance, these forms of government intervention in the market for air
travel will be beneficial to the society.
[10]

[Total: 45]

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Question 2 Economic Challenges and Transformation in Asia

Table 1: Real GDP (Year-over-year change; percent)

Initial Growth Revised Growth

Estimates Estimates
(Apr 2019) (Oct 2019)
2017 2018 2019* 2020* 2019* 2020*
Asia 5.7 5.5 5.4 5.4 5.0 5.1
Hong Kong 3.8 3.0 2.7 3.0 0.3 1.5
Singapore 3.7 3.1 2.3 2.4 0.5 1.0
Malaysia 5.7 4.7 4.7 4.8 4.5 4.4
Indonesia 5.1 5.2 5.2 5.2 5.0 5.1
*Figures for 2019 and 2020 are estimated.

Source: World Economic Outlook Oct 2019, IMF, accessed 15th July 2021

Table 2: HDI data of selected Asian countries

Human Development Gross National Income
HDI
Country Index (HDI) (GNI) per capita
rank
(value) (2017 PPP$)
4 Hong Kong, China (SAR) 0.949 62,985
11 Singapore 0.938 88,155

Source: United Nations Development Programme, accessed 14th July 2021

Extract 5: Caught in Prolonged Uncertainty - Challenges and Opportunities for Asia

Prolonged global economic uncertainty, trade war, and growth deceleration in the economies of
important trading partners are influencing economic growth in Asia and the Pacific. Growth in Asia
continued to soften in the first half of 2019, driven by a pronounced decline in fixed investments and
exports. Domestic demand held up, largely on consumption, while investment, trade, and
manufacturing weakened significantly. Inflation remained subdued in most economies driven by the
slowdown in economic activity and lower oil prices, prompting many Asian central banks to cut
interest rates.

The uncertain global environment and cyclical slowdown in Asia highlight the need for policies aimed
at buffering the slowdown, strengthening resilience and raising inclusive medium-term growth. Fiscal
policy should support domestic demand in countries where it is needed. In China, given the recent
round of tariff (import tax) increases, some stimulus could be appropriate to stabilise growth. Monetary
policy should generally be accommodative. Structural policies could lay the groundwork for inclusive
growth through the medium term. Policies should aim at upgrading human capital and stimulating
labour supply. These include measures to broaden access to education and vocational training and
promote the participation of women and the elderly in the labour force.

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Source: Asia and Pacific Regional Economic Outlook Oct 2019, IMF, accessed 15th July 2021
Extract 6: A New Normal

A job market in transformation

Governments in developing countries across Asia-Pacific are in a race to overcome poverty, the lack
of infrastructure and other significant obstacles to catch up with the rest of the digital world. The digital
transformation will displace existing jobs and the distribution of jobs across sectors will shift
considerably in the process. Employment and salaries are expected to rise in the healthcare industry,
spurred by the ageing population. For example, in Singapore, salaries of workers in the healthcare
industry are expected to rise by up to 20% alone in 2020. However, labour-intensive sectors such as
manufacturing, transport and storage are likely to see a reduction in employment levels as a result of
automation. It is expected that 53 million workers will have to be reskilled in ASEAN alone.

The new focus on sustainability

Sustainability will also continue to rise on the agendas of governments in the region. Both the
institutional definition and scope for business will continue to expand to cover topics from health and
wellness to diversity and equality opportunities. Investors will also have to play their part to shift away
from primary industries such as oil and gas, mining and agricultural commodities to business models
that address environmental and social needs, such as renewable energy and for-profit hospital
networks that offer underserved populations better access to healthcare.

A tricky balance for government

As this future unfolds, governments will need to get a few things right. They will need to create trade
and investor-friendly reforms, promote social and financial inclusion, invest in hard and soft
infrastructure and institute public-private partnerships. They will need to innovate and reform
education to ensure there is a competitive and appropriately skilled workforce. While they make these
moves, they will be required to balance technological advancement and job creation and talent
reskilling, economic development and sustainability.

World Bank recently reported that many ASEAN countries underperform in adopting innovation due to
insufficient information on new technologies, uncertainties in projects, weak firm capabilities, poor
staff skills, limited funding options and the lack of government support. It added that Japan, the
Republic of Korea and Singapore have all used innovation as a vehicle to improve efficiency and
boost their incomes with great success.
Source: World Economic Forum 2019

Extract 7: Mind the Infrastructure Gap

Infrastructure is the backbone of any economy and is critical to unlocking a country’s growth. Fuelled
by rapid urbanisation and population growth, Asia is facing a growing infrastructure deficit between
what is needed and what is available.

The United Nations (UN) expects South East Asia’s population that lives in urbanised areas to rise
from 50.9 to 66.4 percent by 2050. Because of this, throughout Southeast Asia, there has been a
tremendous push towards improving infrastructure. Indonesian President Joko Widodo’s government
is planning to spend US$327 billion on a pipeline of 265 projects, and Philippine President Rodrigo
Duterte has earmarked US$180 billion for railways, roads and airports.

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The ability of ASEAN countries to continue growing at their current rates will depend largely on how
much infrastructure they can deliver in the coming years. From power generation, clean water,
effective utility networks and improvements in transportation networks – these are all essential to
ensuring that Southeast Asia is able to fulfil its potential in the coming years.

Source: Reuters, accessed 2nd August 2021

Extract 8: Innovation and Economic Growth

In a world where economies are built around what is “new and improved”, it’s not enough to just keep
up or do as the others do. From the earliest years following its inception, Singapore knew it had to find
new and creative ways of getting things done, in order to get ahead. As outlined in the Committee on
the Future Economy report, innovation - both to make more productive use of resources, and to
create new businesses and new products - is an important priority for Singapore.

Singapore’s Minister for Trade and Industry said that “skills must be complemented by a greater
appetite for risk and tolerance for failure, especially in the context of innovation.” Singaporeans must
be willing to venture into uncharted waters and embrace opportunities, and to stay resilient and
flexible. Authorities have also affirmed innovation could be the key to unlocking regional and global
markets.

Source: Singapore Management University, accessed 1st August 2021

Extract 9: Can We Have Prosperity Without Growth?

In 1930, English economist J M Keynes speculated that by the year 2030 capital investment and
technological progress would have raised living standards as much as eightfold, creating a society so
rich that people would work as little as fifteen hours a week, devoting the rest of their time to leisure
and other “non-economic purposes.”

This transformation hasn’t taken place yet, and most economic policymakers remain committed to
maximising the rate of economic growth. But after a century in which G.D.P. per person has gone up
more than sixfold in the United States, a vigorous debate has arisen about the feasibility and wisdom
of creating and consuming ever more stuff, year after year. Increasing alarm about climate change
and other environmental threats have given birth to the “degrowth” movement, which calls on
advanced countries to embrace zero or even negative G.D.P. growth. “The faster we produce and
consume goods, the more we damage the environment,” says ecological economist Giorgos Kallis.

Winners of the 2019 Nobel Prize in Economics, Abhijit Banerjee and Esther Duflo, point out that a
larger G.D.P. doesn’t necessarily mean a rise in human well-being and the pursuit of it can sometimes
be counterproductive. They argue that governments should concentrate on specific measures with
proven benefits, such as helping the poorest members of society get access to health care, education,
and social advancement. Nevertheless, they noted that, since 1990, the number of people living in
extreme poverty fell from nearly two billion to around seven hundred million. China and India lifted
millions out of extreme deprivation by integrating their countries into the global capitalist economy,
supplying low-cost goods and services to more advanced countries.

Adapted from The New Yorker, Feb 2020

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Questions

(a) Table 1 shows a downward revision of economic growth rate for many economies. Explain
why economists often have to revise economic growth figures.
[2]

(b) With reference to Table 2, explain why Hong Kong HDI value is higher than Singapore, despite
a lower GNI per capita (PPP$). [4]

(c) With reference to Extract 5,

(i) Using a diagram, explain why inflation will remain subdued in most Asian economies.
[6]

(ii) Explain how “structural policies could lay the groundwork for inclusive growth”.
[6]

(d) With reference to Extract 6, using a relevant diagram, explain why “employment and wages
are expected to rise in the healthcare industry” and comment briefly on the extent of increase
in the wage rate.
[5]

(e) Discuss whether innovation or infrastructure spending is the key to improving economic
performance of a country.
[12]

(f) Explain why most economic policymakers remain “committed to maximising economic growth”
(Ext. 9) and discuss whether you agree that this commitment will improve the standard of living
in a country. [10]

[Total: 45]

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