A Level H2 Economics International Economics Quiz

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

Section A: Knowledge and Application

1. Comparative Advantage (2m): The ability of a country to produce a good at a lower opportunity cost than another country.
2. Absolute vs. Comparative (3m): Absolute advantage is the ability to produce more of a good using the same resources. Comparative advantage focuses on the relative cost (opportunity cost) of production. A country can have absolute advantage in everything but still benefit from trade via comparative advantage.
3. Trade Surplus vs. Deficit (3m): A trade surplus occurs when the value of exports exceeds imports (positive balance). A trade deficit occurs when imports exceed exports (negative balance).
4. Protectionist Reasons (2m): (Any two) Protecting infant industries, preventing dumping, national security/strategic autonomy, protecting domestic employment.
5. Globalisation (3m): The increasing integration of world economies through trade, financial flows, and labor movement. Example: Singapore's role as a global financial hub attracting FDI from diverse nations.

Section B: Analytical Application

6. Tariff Diagram (6m):
   • Diagram: Supply/Demand for imports. Tariff shifts supply curve up or creates a price gap.
   • Analysis: Price increases $\rightarrow$ domestic quantity demanded falls $\rightarrow$ domestic quantity supplied increases $\rightarrow$ imports decrease.
7. Comparative Advantage Mechanism (6m):
   • Explain that countries specialize in goods where they have the lowest opportunity cost.
   • This increases total global output.
   • Trade allows countries to consume outside their PPC.
8. Currency Appreciation (6m):
   • SGD $\uparrow \rightarrow$ Exports become more expensive in foreign currency $\rightarrow$ Demand for exports $\downarrow$.
   • Imports become cheaper $\rightarrow$ Demand for imports $\uparrow$.
   • Result: Lower price competitiveness for non-oil domestic exports.
9. Quotas vs. Tariffs (4m): Tariffs generate government revenue (tax per unit). Quotas limit quantity; they do not generate government revenue unless the government sells the import licenses.
10. Derived Demand (6m):
    • Diagram: Global market for Lithium (Price $\uparrow$, Q $\uparrow$).
    • Analysis: Higher demand for EVs $\rightarrow$ Higher demand for Lithium $\rightarrow$ Higher demand for labor in mines (derived demand).
11. Free Trade & Variety (5m): Specialization leads to economies of scale $\rightarrow$ lower costs $\rightarrow$ more firms entering global markets $\rightarrow$ increased competition and innovation $\rightarrow$ more variety/quality for consumers.
12. Depreciation & Current Account (6m):
    • Currency $\downarrow \rightarrow$ Exports cheaper, Imports dearer.
    • If $PED_{exports} + PED_{imports} > 1$ (Marshall-Lerner), the value of exports rises more than the cost of imports.
    • Current account moves toward surplus.
13. Dynamic Efficiency (5m): Efficiency achieved through innovation and R&D over time. Trade exposes firms to global competition, forcing them to innovate to survive, thus improving dynamic efficiency.
14. Infant Industries (6m): Protection (tariffs/quotas) shields new firms from established global giants $\rightarrow$ allows them to achieve economies of scale and learn-by-doing $\rightarrow$ eventually become competitive enough to face free trade.
15. Terms of Trade (5m): $TOT = (\text{Index of Export Prices} / \text{Index of Import Prices}) \times 100$. Deterioration means export prices fall relative to import prices; the country must export more to buy the same amount of imports.

Section C: Evaluation and Synthesis

16. Free Trade Evaluation (8m):
    • Pros: Lower prices, higher variety, efficiency gains, GDP growth.
    • Cons: Structural unemployment in uncompetitive sectors, over-reliance on specific partners, environmental degradation.
    • Judgment: Benefits depend on the country's ability to transition labor and the nature of the goods traded.
17. Tariffs vs. Quotas (8m):
    • Tariffs: Revenue generation, transparent, market-based.
    • Quotas: Certainty of quantity limit, more restrictive, risk of corruption (license seeking).
    • Judgment: Tariffs are generally preferred by the WTO for transparency; quotas are more "aggressive" protection.
18. Globalisation & Vulnerability (8m):
    • Agreement: Supply chain disruptions (e.g., pandemic), financial contagion (2008 crisis).
    • Counter-argument: Diversification of markets reduces reliance on a single neighbor; global cooperation on crises.
    • Judgment: Interdependence increases risk but also provides a network of support.
19. Exchange Rate Policy (8m):
    • Effectiveness: Managing inflation (appreciation lowers import prices), managing growth (depreciation boosts exports).
    • Limitations: Conflict between inflation and growth goals; external volatility.
    • Judgment: Crucial for small open economies (like Singapore) as they lack monetary policy autonomy.
20. Growth vs. BOP (8m):
    • Trade-off: Rapid growth $\rightarrow$ higher domestic income $\rightarrow$ higher demand for imports $\rightarrow$ BOP deficit.
    • Mitigation: Supply-side policies to increase export capacity.
    • Judgment: Short-term deficits may be acceptable for long-term capacity building.