A Level H2 Economics International Economics Quiz

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

Section A: Multiple Choice & Short Concepts

1. B
Explanation: Comparative advantage is defined by lower opportunity cost, not absolute resource usage (which is absolute advantage).

2. B
Explanation: Appreciation makes exports more expensive in foreign currency terms, reducing demand (volume) from foreign buyers.

3. C
Explanation: Sanitary standards are non-tariff barriers. A, B are tariffs (taxes). D is a subsidy (export promotion), not a barrier to imports directly, though it distorts trade.

4. C
Explanation: Purchase of shares (financial assets) without controlling interest is Portfolio Investment. It is a capital outflow recorded in the Financial Account.

5. B
Explanation: The infant industry argument posits that new industries need temporary protection to grow, achieve economies of scale, and lower costs to compete globally.

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Section B: Data Response & Diagrammatic Analysis

6. Effect of Tariff on Consumer Welfare (4 marks)

• Diagram (2 marks): Correctly drawn supply and demand diagram for textiles in Country A. Show world supply ($S_w$) horizontal, then shift up to $S_w + tariff$. Indicate new higher price ($P_1$) and lower quantity ($Q_1$). Shade loss in consumer surplus.
• Explanation (2 marks): The tariff raises the domestic price of textiles. Consumers face higher prices and consume less. Consumer surplus decreases by the area $(P_1 - P_w) \times Q_1$ plus the triangle of lost consumption. There is a deadweight loss due to inefficient domestic production and reduced consumption.

7. Reasons for Tariff Despite Welfare Loss (4 marks)

• Reason 1: Protection of Domestic Jobs/Industry (2 marks): The tariff protects domestic textile producers from foreign competition, preventing unemployment in that sector. This may be socially or politically important.
• Reason 2: Government Revenue/Anti-Dumping (2 marks): The tariff generates tax revenue for the government. Alternatively, it may be imposed to counteract dumping (selling below cost) by Country B, ensuring fair competition.

8. Fixed vs. Managed Float (2 marks)

• Fixed Exchange Rate (1 mark): The currency value is pegged to another currency or basket at a specific rate. The central bank must intervene heavily (buy/sell reserves) to maintain this rate.
• Managed Float (1 mark): The currency value is determined by market forces but the central bank intervenes occasionally to smooth out excessive volatility or guide the trend (e.g., MAS managing S$NEER within a band).

9. Depreciation and Cost-Push Inflation (3 marks)

• Mechanism (3 marks): Depreciation makes imports more expensive in domestic currency. Since Singapore imports raw materials, intermediate goods, and consumer goods, the cost of production for firms rises (imported inflation). Firms pass these higher costs to consumers in the form of higher prices, leading to cost-push inflation.

10. J-Curve Effect (3 marks)

• Explanation (3 marks): In the short run, demand for exports and imports is price inelastic (contracts are fixed, habits take time to change). Therefore, a depreciation raises the import bill (higher price, same volume) while export revenue rises slowly. The current account worsens. Over time, demand becomes elastic as consumers switch to cheaper domestic goods and foreigners buy more exports, improving the current account.

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Section C: Structured Response & Application

11. Globalisation and Income Inequality (4 marks)

• Channel 1: Skill-Biased Technological Change/Trade (2 marks): Globalisation increases demand for skilled labor in developed economies (comparative advantage in high-tech/services) while reducing demand for low-skilled labor (outsourced to developing countries). This widens the wage gap between skilled and unskilled workers.
• Channel 2: Capital Mobility (2 marks): Capital owners benefit from accessing larger global markets and cheaper labor abroad, increasing profits/returns on capital. Labor’s bargaining power may weaken due to threat of relocation, suppressing wages. Thus, income shifts from labor to capital.

12. Supply-Side Policies and Structural Deficit (4 marks)

• Explanation (2 marks): Structural deficits arise from long-term lack of competitiveness. Supply-side policies (e.g., education, infrastructure, R&D subsidies) improve productivity and lower unit labor costs.
• Evaluation (2 marks): This makes exports more price and non-price competitive, increasing export demand. However, these policies have long time lags and may not address short-term cyclical deficits. They are effective for long-term correction but not immediate fixes.

13. Trade Creation vs. Trade Diversion (4 marks)

• Trade Creation (2 marks): Occurs when an FTA leads to replacement of high-cost domestic production with lower-cost imports from a partner country. This improves efficiency and welfare.
• Trade Diversion (2 marks): Occurs when an FTA leads to replacement of low-cost imports from non-member countries with higher-cost imports from member countries (due to tariff preferences). This reduces efficiency and welfare.

14. MAS and Exchange Rate Policy (4 marks)

• Reason 1: Small Open Economy (2 marks): Singapore is highly trade-dependent (imports/exports > GDP). Exchange rate movements directly impact import prices (inflation) and export competitiveness. Interest rates are less effective as capital is highly mobile and domestic interest rates are influenced by global rates.
• Reason 2: Inflation Control (2 marks): MAS prioritizes price stability. Since most consumption goods are imported, managing the S$NEER (appreciating during high inflation) is the most direct tool to curb imported inflation.

15. Current Account Deficit Harmful? (4 marks)

• Not Always Harmful (2 marks): A deficit may reflect strong domestic investment opportunities funded by foreign capital (e.g., developing infrastructure). If the borrowed funds generate high returns, the deficit is sustainable. It also allows higher current consumption.
• Potentially Harmful (2 marks): If the deficit is due to low competitiveness or excessive consumption (living beyond means), it may lead to accumulation of foreign debt, currency depreciation, and eventual crisis if capital flows reverse. Context matters (cause and duration).

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Section D: Extended Response & Evaluation

16. Protectionism in Singapore (6 marks)

• Arguments Against Protectionism (Agree) (3 marks): Singapore is a small, open economy with no natural resources. It relies on trade for survival. Protectionism would raise costs for businesses (imported inputs), reduce competitiveness, invite retaliation, and lead to inefficiency (loss of comparative advantage). Consumer welfare would fall due to higher prices and less choice.
• Arguments For Limited Protection (Disagree/Nuance) (2 marks): Some strategic sectors (e.g., food security, water) may require limited support or stockpiling, though not necessarily high tariffs. Infant industries in new tech sectors might need temporary R&D support (subsidies rather than tariffs).
• Conclusion (1 mark): Overall, protectionism is largely detrimental for Singapore. The economy thrives on free trade. Any intervention should be targeted (e.g., subsidies for productivity) rather than broad trade barriers.

17. Strong SGD: Manufacturing vs. Services (6 marks)

• Impact on Manufacturing (3 marks): Manufacturing is highly trade-exposed (exports). A strong SGD makes Singapore-made goods more expensive abroad, reducing export volume and revenue. Profit margins may shrink if firms cannot pass on costs. This sector is negatively affected.
• Impact on Services (2 marks): Services (e.g., tourism, finance, education) are mixed. Tourism may suffer (Singapore becomes expensive for tourists). However, financial services and MNC headquarters may benefit from stronger purchasing power for overseas investments and lower costs for imported talent/technology.
• Evaluation (1 mark): The manufacturing sector is generally more sensitive to exchange rate fluctuations due to price elasticity of demand for goods vs. services. However, the net effect depends on the sector's reliance on imported inputs (which become cheaper with strong SGD), offsetting some export losses.

18. FDI Benefits to Host Country (6 marks)

• Benefits (3 marks): FDI brings capital injection, technology transfer, management expertise, and job creation. It can boost productivity and integrate the host country into global supply chains. Tax revenue may increase.
• Disadvantages (2 marks): Profits may be repatriated (outflow in Primary Income). Local firms may be crowded out by powerful MNCs. Environmental standards may be lowered to attract investment. Dependency on foreign decisions.
• Conclusion (1 mark): Net benefits depend on the host country’s regulatory framework and absorptive capacity. If the government enforces local content rules and environmental standards, benefits likely outweigh costs.

19. Expenditure-Switching vs. Expenditure-Reducing (6 marks)

• Expenditure-Switching (Devaluation) (2 marks): Switches demand from imports to domestic goods. Effective if Marshall-Lerner condition holds (PEDx + PEDm > 1). Less painful than recession as it boosts domestic output. However, causes inflation and may take time (J-Curve).
• Expenditure-Reducing (Fiscal/Monetary Contraction) (2 marks): Reduces overall aggregate demand, lowering imports. Effective in reducing deficit quickly but causes unemployment and lower growth. Socially costly.
• Evaluation (2 marks): Switching policies are generally preferred if the deficit is due to competitiveness issues, as they preserve growth. Reducing policies are necessary if the economy is overheating. A combination is often used: switching to improve trade balance, reducing to control inflationary pressure from devaluation.

20. Globalisation: Benefits vs. Costs (6 marks)

• Benefits (2 marks): Efficiency gains from comparative advantage, lower prices for consumers, access to larger markets, technology diffusion, and cultural exchange. Developing countries can attract FDI and grow.
• Costs (2 marks): Income inequality (within and between countries), structural unemployment in declining industries, environmental degradation (race to the bottom), and vulnerability to global financial shocks. Loss of cultural identity.
• Evaluation (2 marks): While globalisation increases global wealth, the distribution is uneven. Developed countries may face wage stagnation for low-skilled workers; developing countries may face exploitation. Net benefits are positive but require domestic policies (education, safety nets) to manage distributional effects. It is not beneficial for all individuals equally, even if countries gain on aggregate.