A Level H2 Economics International Economics Quiz

Answer Key - International Economics Quiz

1. Comparative Advantage [2]

• Definition: The ability of a country to produce a good or service at a lower opportunity cost than another country. (2 marks)

2. Trade Surplus vs. Deficit [2]

• Trade Surplus: Value of exports exceeds value of imports. (1 mark)
• Trade Deficit: Value of imports exceeds value of exports. (1 mark)

3. Reasons for Protectionism [2]

• Any two: Protect infant industries, protect domestic employment, reduce dependence on imports (national security), prevent dumping. (2 marks)

4. Exchange Rate [3]

• Definition: The price of one currency in terms of another. (1 mark)
• Fixed: Pegged to another currency or gold by the central bank. (1 mark)
• Floating: Determined by market forces of demand and supply. (1 mark)

5. Productivity and Competitiveness [3]

• Higher productivity $\rightarrow$ lower unit costs of production $\rightarrow$ lower prices for exports $\rightarrow$ increased international competitiveness. (3 marks)

6. Tariff Impact [6]

• Diagram: Supply/Demand for electronics. Shift in supply or price floor effect.
• Analysis: Tariff increases the price of imports $\rightarrow$ domestic consumers switch to domestic substitutes $\rightarrow$ domestic price rises (though less than world price + tariff) $\rightarrow$ domestic quantity supplied increases. (6 marks)

7. Derived Demand [6]

• Analysis: Increase in demand for EVs $\rightarrow$ increase in demand for batteries $\rightarrow$ increase in derived demand for lithium.
• Effect: Lithium price rises, quantity traded rises. (6 marks)

8. SGD Depreciation [6]

• Analysis: SGD depreciation $\rightarrow$ services become cheaper for foreigners $\rightarrow$ increase in demand for Singaporean services $\rightarrow$ increase in export volume (assuming demand is price elastic). (6 marks)

9. Trade War and Global GDP [6]

• Analysis: Tariffs $\rightarrow$ higher prices $\rightarrow$ lower trade volumes $\rightarrow$ reduced specialization/comparative advantage $\rightarrow$ lower global production/efficiency $\rightarrow$ decrease in global real GDP. (6 marks)

10. Export Ban [6]

• Diagram: Domestic S/D.
• Analysis: Export ban $\rightarrow$ supply to domestic market increases (since goods cannot be exported) $\rightarrow$ domestic price falls $\rightarrow$ domestic quantity consumed increases. (6 marks)

11. Terms of Trade (TOT) [5]

• Definition: Ratio of export prices to import prices.
• Analysis: Increase in TOT $\rightarrow$ country gets more imports for the same amount of exports $\rightarrow$ increase in real income/welfare. (5 marks)

12. Currency Appreciation [6]

• Analysis: Appreciation $\rightarrow$ exports more expensive, imports cheaper $\rightarrow$ exports $\downarrow$, imports $\uparrow$.
• Marshall-Lerner: If sum of elasticities $> 1$, the current account balance worsens (deficit increases or surplus decreases). (6 marks)

13. Infant Industry [5]

• Analysis: New industries lack economies of scale and experience $\rightarrow$ cannot compete with established global firms $\rightarrow$ protection allows them to grow and reach efficient scale. (5 marks)

14. Specialization [5]

• Analysis: Countries produce goods with lowest opportunity cost $\rightarrow$ resources allocated efficiently $\rightarrow$ total global output increases as production shifts to most efficient producers. (5 marks)

15. Oil Price and AD/AS [6]

• Analysis: Oil is a key input $\rightarrow$ price increase $\rightarrow$ cost of production rises $\rightarrow$ SRAS shifts left (cost-push inflation) $\rightarrow$ real GDP falls. (6 marks)

16. Protectionism and Consumers [8]

• Agree: Higher prices, less choice, lower quality due to lack of competition.
• Disagree: Protects jobs (income effect), ensures supply of essential goods.
• Evaluation: Depends on the elasticity of substitutes and the scale of the tariff. (8 marks)

17. Exchange Rate Manipulation [8]

• Pros: Lower currency $\rightarrow$ cheaper exports $\rightarrow$ higher volume.
• Cons: Higher cost of imports (inflation), risk of retaliation (trade wars), may not work if demand is inelastic.
• Evaluation: Effectiveness depends on the degree of openness and the nature of the exports. (8 marks)

18. Globalization and Developing Nations [8]

• Benefits: FDI, technology transfer, access to larger markets, job creation.
• Disadvantages: Dependence on foreign markets, "race to the bottom" in labor/environmental standards, vulnerability to global shocks.
• Evaluation: Balance depends on the government's ability to manage the transition. (8 marks)

19. Current Account Deficit [8]

• Weakness: Over-reliance on imports, lack of competitiveness, unsustainable debt.
• Strength: Investment in capital goods (future growth), high income levels allowing more imports.
• Evaluation: Depends on whether the deficit is financed by equity (FDI) or debt. (8 marks)

20. Free Trade and Singapore [8]

• Pros: Small domestic market $\rightarrow$ needs exports for growth; comparative advantage in high-value services/electronics.
• Cons: Vulnerability to external shocks (global recession), loss of domestic industry.
• Evaluation: Essential for Singapore given its lack of natural resources; growth is driven by being a global hub. (8 marks)