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A Level H2 Economics International Economics Quiz

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Questions

A-Level Economics H2 Quiz - International Economics

Name: __________________________
Class: __________________________
Date: __________________________
Score: _______ / 60

Duration: 60 Minutes
Total Marks: 60
Instructions:

Answer all questions.
This quiz covers Theme 10: International Trade (Comparative Advantage, Protectionism, Globalisation, Exchange Rates).
Use diagrams where appropriate to support your analysis.
Marks are indicated in brackets [ ] at the end of each question or part.

Section A: Short Answer & Data Interpretation (20 Marks)

1. Define the term ‘comparative advantage’. [2]

2. Distinguish between a tariff and a quota as forms of protectionism. [2]

3. Explain one reason why a country might experience a deficit in its current account of the Balance of Payments. [2]

4. With reference to the concept of elasticity, explain why a depreciation of the Singapore Dollar (SGD) may not immediately improve Singapore’s trade balance. [3]

5. The table below shows the output per worker per day in Country A and Country B for two goods: Wheat and Cloth.

Country	Wheat (units)	Cloth (units)
Country A	10	5
Country B	8	4

(a) Calculate the opportunity cost of producing 1 unit of Cloth in Country A. [1]
 (b) Determine which country has the comparative advantage in the production of Wheat. Show your working. [2]

6. Identify two non-tariff barriers to trade other than quotas. [2]

7. Explain how an increase in global oil prices might affect the terms of trade for a net oil-importing country like Singapore. [3]

8. Define ‘globalisation’ in the context of international economics. [2]

9. State one potential benefit and one potential cost of Foreign Direct Investment (FDI) for a host developing country. [2]

10. Explain the difference between a floating exchange rate system and a managed float system. [2]

Section B: Structured Response & Analysis (20 Marks)

11. "Protectionism is never justified in a modern economy."
Evaluate this statement by explaining two arguments for protectionism and two arguments against it. [10]

12. Using a diagram, explain how an export subsidy provided by a government to its domestic producers affects:
(a) Domestic price and quantity supplied.
(b) Government expenditure.
(c) Allocative efficiency. [10]

13. Explain two factors that determine the price elasticity of demand for a country’s exports. [4]

14. Distinguish between ‘trade creation’ and ‘trade diversion’ in the context of economic integration. [4]

15. Explain how a significant appreciation of a country’s currency might impact its inflation rate. [4]

16. Identify two reasons why a government might impose an embargo on trade with a specific country. [4]

17. Explain the concept of ‘dumping’ in international trade and why it is considered unfair practice. [4]

18. Describe one way in which multinational corporations (MNCs) contribute to technology transfer in host countries. [4]

19. Explain the difference between the ‘current account’ and the ‘capital and financial account’ in the Balance of Payments. [4]

20. Discuss whether a weak currency is always beneficial for a country’s economic growth. [16]
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Answers

A-Level Economics H2 Quiz - International Economics (Answer Key)

Section A: Short Answer & Data Interpretation

1. Define the term ‘comparative advantage’. [2]

Answer: Comparative advantage exists when a country can produce a good or service at a lower opportunity cost than another country.
Marking: 1 mark for "lower opportunity cost"; 1 mark for reference to "another country" or comparison.

2. Distinguish between a tariff and a quota as forms of protectionism. [2]

Answer: A tariff is a tax imposed on imported goods, which raises their price. A quota is a physical limit on the quantity of a good that can be imported.
Marking: 1 mark for defining tariff (tax/price effect); 1 mark for defining quota (quantity limit).

3. Explain one reason why a country might experience a deficit in its current account of the Balance of Payments. [2]

Answer: A country may have a deficit if its imports of goods and services exceed its exports. This could be due to low domestic competitiveness, high domestic income leading to high import consumption, or an overvalued exchange rate.
Marking: 1 mark for identifying imports > exports; 1 mark for a valid reason (e.g., lack of competitiveness, strong currency).

4. With reference to the concept of elasticity, explain why a depreciation of the Singapore Dollar (SGD) may not immediately improve Singapore’s trade balance. [3]

Answer: In the short run, demand for exports and imports is often price inelastic (PED < 1). Therefore, a depreciation leads to a proportionately smaller change in quantity demanded than the change in price. The value of imports rises (since prices rise but volume doesn't fall much), worsening the trade balance initially. This is known as the J-Curve effect.
Marking: 1 mark for mentioning inelastic demand in short run; 1 mark for explaining value of imports rises/worsens balance; 1 mark for reference to J-Curve or time lag.

5. Opportunity Cost and Comparative Advantage. [3]

(a) Opportunity cost of 1 unit of Cloth in Country A:
- Country A produces 10 Wheat or 5 Cloth.
- To produce 5 Cloth, it gives up 10 Wheat.
- 1 Cloth = 10/5 = 2 units of Wheat. [1]
(b) Comparative Advantage in Wheat:
- Opp cost of 1 Wheat in Country A = 5/10 = 0.5 Cloth.
- Opp cost of 1 Wheat in Country B = 4/8 = 0.5 Cloth.
- Note: In this specific numerical example, the opportunity costs are identical. Neither has a comparative advantage.
- Marking: 1 mark for correct calculation of opp cost for A (0.5 Cloth); 1 mark for correct calculation for B (0.5 Cloth); 1 mark for conclusion (No comparative advantage / Equal).

6. Identify two non-tariff barriers to trade other than quotas. [2]

Answer: Any two from: Embargoes, Voluntary Export Restraints (VERs), Technical standards/health and safety regulations, Subsidies to domestic producers, Administrative delays/red tape.
Marking: 1 mark each.

7. Explain how an increase in global oil prices might affect the terms of trade for a net oil-importing country like Singapore. [3]

Answer: Terms of Trade (ToT) = (Index of Export Prices / Index of Import Prices) x 100. Singapore is a net oil importer. An increase in global oil prices raises the average price of Singapore's imports. Assuming export prices remain constant, the denominator increases, causing the ToT ratio to fall (deteriorate).
Marking: 1 mark for ToT formula/concept; 1 mark for identifying rise in import prices; 1 mark for conclusion (deterioration/fall in ToT).

8. Define ‘globalisation’ in the context of international economics. [2]

Answer: Globalisation is the process of increasing integration and interdependence of national economies through cross-border movement of goods, services, capital, technology, and labour.
Marking: 1 mark for "integration/interdependence"; 1 mark for mentioning flows (trade/capital/labour).

9. State one potential benefit and one potential cost of Foreign Direct Investment (FDI) for a host developing country. [2]

Answer:
- Benefit: Technology transfer, job creation, infrastructure development, or increased tax revenue.
- Cost: Repatriation of profits, exploitation of labour/environment, crowding out of local firms, or loss of economic sovereignty.
Marking: 1 mark for valid benefit; 1 mark for valid cost.

10. Explain the difference between a floating exchange rate system and a managed float system. [2]

Answer: In a floating system, the exchange rate is determined entirely by market forces of supply and demand without government intervention. In a managed float (like Singapore), the rate is primarily market-determined, but the central bank intervenes occasionally to smooth out excessive volatility or guide the rate within a policy band.
Marking: 1 mark for floating (market forces only); 1 mark for managed float (intervention/band).

Section B: Structured Response & Analysis

11. "Protectionism is never justified in a modern economy." Evaluate this statement. [10]

Arguments For Protectionism (Justifications):

Infant Industry Argument: New industries in developing countries may need temporary protection from established international competitors to achieve economies of scale and become competitive.
Protection against Dumping: If foreign firms sell below cost to drive out domestic competition, tariffs can prevent predatory pricing and maintain market diversity.
National Security: Protecting industries vital for defense (e.g., steel, food) ensures self-sufficiency during conflicts.
Correcting Balance of Payments Deficits: Tariffs can reduce import expenditure in the short run.

Arguments Against Protectionism (Why it is not justified):

Allocative Inefficiency: Protectionism distorts price signals, leading to over-production in protected sectors and under-consumption, creating deadweight loss.
Retaliation: Other countries may impose retaliatory tariffs, leading to a trade war that reduces global trade volume and welfare.
Higher Prices for Consumers: Tariffs and quotas raise domestic prices, reducing consumer surplus and real income.
X-Inefficiency: Protected domestic firms lack competitive pressure, leading to complacency and higher costs.

Evaluation:

Protectionism is rarely "never" justified; specific cases like infant industries or national security provide valid economic grounds. However, these must be temporary and targeted. Long-term protectionism generally reduces global welfare and efficiency. The statement is too absolute; while free trade is generally superior, strategic protectionism has a role.

12. Export Subsidy Analysis. [10]

Diagram: Should show domestic supply and demand. World Price ( $P_w$ ) is above equilibrium. With subsidy, domestic producers receive $P_w + subsidy$ . Quantity supplied increases from $Q_1$ to $Q_2$ . Quantity demanded domestically may stay same or fall slightly if price passed to consumers (usually assumed constant small open economy price taker for exports, so domestic price stays $P_w$ , but producers get more). Standard Diagram: Supply shifts right or effective price line shifts up for producers.
(a) Domestic price and quantity supplied: Domestic price for consumers usually remains at world price (if small open economy). Quantity supplied by domestic firms increases as they receive higher effective price. [3]
(b) Government expenditure: The government pays the subsidy amount per unit on all exported units. Area = Subsidy per unit $\times$ Quantity Exported. This is a cost to the taxpayer. [3]
(c) Allocative efficiency: Subsidy encourages over-production (quantity supplied > socially optimal level where MC = MB). Creates deadweight loss due to resources being used inefficiently in the subsidized sector. [4]

13. Factors determining price elasticity of demand for exports. [4]

Answer:
1. Availability of Substitutes: If there are many close substitutes for a country's exports from other nations, demand will be more elastic.
2. Degree of Necessity/Luxury: Primary commodities or essential goods tend to have inelastic demand, whereas luxury manufactured goods have more elastic demand.
3. Proportion of Income: If the export good takes up a large proportion of the buyer's income, demand is more elastic.
4. Time Period: Demand is more elastic in the long run as buyers have time to find alternatives.
Marking: 2 marks for each well-explained factor (1 for identification, 1 for explanation). Max 4 marks.

14. Trade Creation vs Trade Diversion. [4]

Answer:
- Trade Creation: Occurs when economic integration (like a customs union) leads to replacement of high-cost domestic production with lower-cost imports from a partner country. This improves welfare.
- Trade Diversion: Occurs when integration leads to replacement of low-cost imports from non-member countries with higher-cost imports from member countries due to tariff preferences. This reduces welfare.
Marking: 2 marks for clear definition/explanation of Trade Creation; 2 marks for clear definition/explanation of Trade Diversion.

15. Impact of currency appreciation on inflation. [4]

Answer: An appreciation of the currency makes imports cheaper in domestic currency terms. This reduces the cost of imported raw materials and finished goods. Lower import prices directly reduce the Consumer Price Index (CPI), leading to lower inflation (imported disinflation). It may also force domestic producers to lower prices to compete with cheaper imports.
Marking: 2 marks for mechanism (cheaper imports); 2 marks for link to inflation/CPI.

16. Reasons for imposing an embargo. [4]

Answer:
1. Political/Military Conflict: To punish a country for aggression or human rights violations (e.g., sanctions).
2. Health/Safety: To prevent the spread of disease (e.g., banning meat imports from affected regions) or unsafe products.
Marking: 2 marks for each valid reason with brief explanation.

17. Dumping and Unfair Practice. [4]

Answer: Dumping is selling goods in a foreign market at a price below their domestic price or below the cost of production. It is considered unfair because it is a form of predatory pricing intended to drive domestic competitors out of business, allowing the foreign firm to establish a monopoly and raise prices later.
Marking: 2 marks for definition; 2 marks for explanation of why it is unfair (predatory/monopoly power).

18. MNCs and Technology Transfer. [4]

Answer: MNCs bring advanced technology, management skills, and production techniques to host countries. This occurs through training local employees, demonstrating new processes to local suppliers (spillover effects), and joint ventures. This raises the productivity and technical capability of the host country's workforce and firms.
Marking: 2 marks for identifying the mechanism (training/spillovers); 2 marks for explaining the benefit (productivity/skill uplift).

19. Current Account vs Capital/Financial Account. [4]

Answer:
- Current Account: Records flows of goods, services, primary income (investment income), and secondary income (transfers). It reflects the country's net income.
- Capital and Financial Account: Records flows of assets and liabilities, such as Foreign Direct Investment (FDI), portfolio investment, and changes in reserve assets. It reflects how the current account deficit/surplus is financed.
Marking: 2 marks for Current Account description; 2 marks for Capital/Financial Account description.

20. Discuss whether a weak currency is always beneficial for a country’s economic growth. [16]

Arguments for Weak Currency Benefiting Growth:

Export Competitiveness: A weaker currency makes exports cheaper for foreign buyers, increasing demand for exports. This boosts aggregate demand (AD) and GDP.
Import Substitution: Imports become more expensive, encouraging consumers to buy domestically produced goods, further boosting domestic industries.
Tourism: A weaker currency makes the country a cheaper destination for tourists, increasing service exports.
Multiplier Effect: Increased export and domestic demand can lead to job creation and higher income, stimulating further consumption.

Arguments Against Weak Currency (Costs/Negative Impact on Growth):

Cost-Push Inflation: Imports (raw materials, energy, food) become more expensive. This increases production costs for firms and living costs for consumers, leading to inflation. High inflation can erode purchasing power and create uncertainty, hindering investment.
Debt Servicing: If the country or its firms have foreign-currency-denominated debt, a weaker currency increases the cost of servicing this debt, potentially leading to financial distress or bankruptcy.
Retaliation: Other countries may view the weak currency as a deliberate devaluation to gain unfair trade advantage, leading to trade wars or tariffs.
Inelastic Demand: If demand for exports/imports is inelastic (Marshall-Lerner condition not met), the trade balance may worsen, and the inflationary impact may dominate, reducing real income and growth.

Evaluation:

A weak currency is not always beneficial. Its impact depends on:
- Elasticities: Whether the Marshall-Lerner condition holds.
- Structure of Economy: Net importer vs exporter. Singapore, as a net importer of food/energy, suffers from imported inflation.
- Global Context: If global demand is weak, cheaper exports may not boost volume significantly.
- Time Lag: J-Curve effect means short-term worsening before improvement.
Conclusion: While a weak currency can boost export-led growth in the short run, the long-term costs of inflation and reduced purchasing power can undermine sustainable growth. For a small open economy like Singapore, stability (managed float) is often preferred over deliberate weakness to maintain confidence and control inflation.