ANDERSON JUNIOR COLLEGE JC2 Preliminary Examination

ECONOMICS HIGHER 2

9732/01

Paper 1 12 SEPTEMBER 2007

Additional materials: Writing paper

2 hours 15 minutes

READ THESE INSTRUCTIONS FIRST

Write your name, PDG and index number in the spaces provided on all the work you hand in. Write in dark blue or black ink. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid.

Answer all questions. Begin your answer to each question on a fresh sheet of writing paper. At the end of the examination, fasten your answers to each question separately. Fasten this cover page in front of your answers to Question 1. The invigilators will collect the answers to each question separately. The number of marks is given in brackets [ ] at the end of each question or part question.

Question Number Name: ________________________________ ( )

Marks Awarded

1 2

PDG: _________________________________

Total Marks

60

This document consists of 5 printed pages, including this cover page. [Turn over

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Answer all questions. Question 1 Extract 1: Singaporean tastes One of the most affluent nations in Asia, the city-state of Singapore presents a small but mature retail environment. Rising incomes and busier lifestyles have influenced shopping and product preferences as the majority of Singaporeans prefer to shop in modern retail outlets, seeking convenience and packaged foods in addition to high quality basic food products. The supremacy of modern grocery outlets is set to rise further. Singaporean consumers have embraced modern retail outlets for their air-conditioned comfort, hygiene and user-friendly layouts. They already make up around 70 percent in value of the grocery retail market, with the balance going to traditional outlets including wet markets and provision shops. The market share of traditional retailers continues to be eroded by their modern counterparts. Although traditional outlets are considered to have fresher produce and a more personal service, they provide a limited product selection and a less comfortable shopping environment. The proportion of households spending the bulk of their grocery money at traditional grocery shops and wet markets continues to fall, from 22 percent in 2002 to 14 percent in 2003. Adapted from KPMG strategic & commercial intelligence advisory on Grocery Retailing in Asia Pacific Extract 2: An underdeveloped Indian grocery retail market Some 98% of the US$248 billion retail industry in India still belongs to traditional small independent or family-owned retailers. However, in common with most Asian countries, such stores are steadily losing share to modern format self-service stores: the number of traditional grocery outlets has grown by only two percent since 2001 while organized stores have increased by 18 percent. Despite their advantages personalised service, accessibility, understanding of customer needs their limited product range and lack of promotional schemes mean that they will struggle to retain the progressively affluent and sophisticated customers. However, this level of growth in organized grocery stores is not without problems. Organized grocery retailers face stiff competition from traditional-style grocers, who are clearly still the preferred sources for the Indian masses, especially in smaller cities and towns. Traditional stores are mostly owner-operated, and have low property and labour costs. There are significant opportunities in this fragmented market for domestic and international operators to establish a brand with a regional or national presence. But without more consolidated power, modern retailers currently lack efficiency in sourcing, supply chain management, infrastructure and technology systems. Adapted from KPMG strategic & commercial intelligence advisory on Grocery Retailing in Asia Pacific Supermarketization

Extract 3: Supermarketization in China "Supermarketization" is transforming China's food sector into a modern retail system. Modern supermarkets, convenience stores, hypermarkets - retail formats nearly non-existent in China in the early 1990s - have now captured an estimated 30% of the urban food market and are growing at rates of 30-40% annually.

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The two main reasons for modern organized retailers unprecedented growth in China: The way they sell to consumers: Supermarkets, engaged in fierce competition with other types of outlets in Chinese economy, are eager to carry new products to meet consumer demand for quality and product diversity. Some advertise exotic products to get customers in the door. The way they buy from suppliers: Supermarket chains employ centralized, high-volume distribution systems that give suppliers a larger target with fewer distribution layers to navigate. Procurement modernization is increasing the advantage of suppliers that can deliver quality products in a timely and price-competitive fashion. These factors should give larger food suppliers a better chance to compete in the Chinese marketplace. Supermarkets are bringing world-class procurement systems into China, establishing large, centralized distribution centers that draw products from throughout China, and from elsewhere in Asia, Oceania, the Americas and Europe. Multinational logistics firms are now operating in China, whose WTO commitments mandate that the country open its market to foreign companies engaged in wholesaling and distribution in 2004. Adapted from Asia Times Online June 24, 2005

Figure 1: Grocery Retail Sales in China by Segment (% of Total Sales), 2004

Source: IGD, 2005; KPMG analysis Tasks (a)

Distinguish, with examples, between the fixed and variable costs involved in the grocery retail industry. How far does the data demonstrate that supermarketization has taken place in China and India? Suggest possible reasons for the above change in China and India respectively. Using information provided where relevant, discuss the possible cost advantages supermarketization entails.

[4]

(b)

(i) (ii)

[6] [4]

(c)

[8]

(d)

Consider the possible strategies traditional retail stores in Singapore could adopt to remain competitive. [8] Total [30 marks]

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Question 2 China-US Textile Trade

Extract 1: Textile trade liberalisation affects rural communities in the U.S. On 1 January 2005, the quotas that governed world textile and apparel trade for decades were removed, the culmination of a 10-year global liberalisation process under the guidance of the World Trade Organization (WTO). WTO members agreed to eliminate textile and apparel trade quotas in four stages between 1995 and 2005, and to expand the import quantities permitted by quotas in the years leading up to their removal. Following the relaxation of import protection in 2005, U.S. clothing imports from Asia have risen and clothing prices have fallen. While both rural and urban communities across the United States have benefited from lower clothing prices, they have also felt the sting of a large number of textile plant closures. U.S. textile and apparel employment has fallen by more than 900,000 jobs since 1994, nearly a 60 percent decline, with some rural communities hit especially hard. These changes have been difficult for many U.S. textile and apparel workers. Compared with displaced workers in other industries, textile and apparel workers were more likely to drop out of the labor force, and those who found new jobs took longer to do so, with three-fourths earning less in their new jobs. Rural areas have been disproportionately affected by the job losses 45 percent of all displaced textile and apparel workers between 1997 and 2003 were residents in rural areas, more than double the rural populations share of the U.S. labor force. Rural communities, as well as workers, have been hurt by these plant closings, as the losses of these long-established businesses can take a large bite out of an areas tax base. With many of these communities already operating with low budgets, those faced with plant closures may be hard-pressed to maintain public service levels. Adapted from United States Department of Agriculture, Economic Research Service, September 2006 Issue of Amber Waves

Extract 2: China-US textile trade a win-win game Since 2003, frictions over the textile trade have been a hot issue for the China-US economic and trade relations. This has been caused by several reasons. Firstly, the strong competitiveness of Chinese textile exports has been translated into great pressure on US textile manufacturers. Over the four years of China's WTO membership, China leads the world in the total of its textile exports and has outpaced Mexico to become the largest textile exporter to the US market. Export of Chinese textile products surged over the first nine months of the year after quotas of these products were lifted. Another reason is that the upsurge of Chinese products into the US market has taken some shares which previously belonged to other developing countries. That has affected the economic interest of the US and its trading partners. Some 300 million US customers prefer "made-in-China" which is high in quality and low in prices. How can the interests of such a huge group be played down compared with the interests of a much smaller group of manufacturers? Mr. Lamy, who has just assumed his job as WTO chief, argued that since the US holds so many products of comparative advantage in world trade, the US should restrain its competition with developing countries for the textile trade, instead of wrangling over the production and sales of socks. Adapted from People's Daily Online, 9 November 2005

Extract 3: Americas fear of China The itch to get tough with Beijing is urgent on the US governments agenda. Brandishing China's growing bilateral trade surplus as proof, government officials have denounced the country as a currency manipulator, an illegal export-subsidiser, a violator of rights to intellectual property and all-round trade

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scoff-law. The bilateral trade imbalance, the target of so many American politicians' anger, is an economic red herring. Its rise reflects changing supply patterns in Asia: America now imports more stuff that has passed through China and correspondingly fewer goods from South Korea and Taiwan. China's overall surplus and America's overall deficit have less to do with the value of the Yuan than with Chinese saving and American spending. Rather than picking fights over the currency, the US government should step back and ask why Americans are so upset with China in the first place. The answer is that China is a scapegoat for broader economic anxieties to do with stagnant wages, rising income-inequality and dwindling health and pension benefits. These insecurities, which also lie behind the bad idea of introducing labour standards in trade agreements, are much better tackled head on at home. By contrast, raising barriers to cheap Chinese imports would disproportionately hit the wallets of poor and middle-income American consumers the very people the Democratic Party in the US government claim to be protecting. Adapted from The Economist, 17 May 2007

Figure 1: Bilateral Deficits on U.S. Trade (% of GDP)

Figure 2: U.S. Annual Gross Domestic Product at 2000 Prices (1995 to 2004)
US Annual Gross Domestic Product, 1995 to 2004
12,000 10,000 8,000 6,000 4,000 2,000 0 1 2 3 4 5 6 7 8 9 10 Year

Source: U.S. Bureau of Economic Analysis

Source: U.S. Bureau of Economic Analysis

Tasks (a) (i) (ii) Describe the trend in the US trade deficit from 1995 to 2004. Suggest possible reasons to account for the trend identified in (ai). Describe how the textile quota works and propose alternative measures the US government could undertake to restrict imports. To what extent does the data support the view that the removal of protectionism was detrimental to the US economy? [2] [4]

(b)

US$ billion

[6]

(c)

[8]

(d)

In view of pressures from the US to revalue the Chinese yuan, discuss the policy measures that the Chinese government can adopt to maintain its trade competitiveness. [10] Total [30 marks]

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