J URONG J UNIOR COLLEGE

PRELIMINARY EXAMINATION 2008

ECONOMICS
Higher 2 9732/02

Paper 2 22 August 2008

Additional Material: Writing Paper / Cover page 2 hours 15 minutes












































READ THESE INSTRUCTIONS FIRST

Write your name and class on all the work you hand in.
Write in dark blue or black pen.
You may use a soft pencil for any diagrams, graphs or rough working.
Do not use staples, paper clips, highlighters or glue.

Answer three questions in total, of which one must be from Section A, one from Section B
and one from either Section A or Section B.


At the end of the examination, place the cover page on top of your answer scripts and fasten
them securely together.

The number of marks is given in brackets [ ] at the end of each question or part question.





This document consists of 2 printed pages.

JJ Economics
[Turn over


2
Answer three questions in total.

Section A

One or two of your three chosen questions must be from this section.

1 At just over $130 a barrel, the price of crude oil has doubled in around a year. In order to
safeguard the state budget, President Susilo Bambang Yudhoyono signalled early this
month that the government will cut fuel subsidy.
-International Herald Tribune, 23 May 2008

(a) Account for the recent sharp increase in the world price of oil. [12]

(b) Discuss how a reduction in the fuel subsidy would impact Indonesians. [13]


2 (a) Explain what factors affect price and output of a firm in the telecommunications
industry. [10]

(b) Discuss whether this model of market structure is the most appropriate to explain
the behaviour of firms in Singapore. [15]


3 The Singapore government has achieved great success in making the city clean and
green by setting stringent emission regulations, implementing strict laws governing
disposal of waste and littering, planting trees and shrubs along roads and overhead
bridges, building park connectors and having a network of drains and canals.

(a) Explain the sources of market failure based on the above statement. [12]

(b) Discuss whether the Singapore government currently adopts the most appropriate
economic policies to improve the quality of the environment. [13]

Section B

One or two of your three chosen questions must be from this section.

4 (a) Using economic analysis, account for the rapid growth of an economy in recent
years. [12]

(b) Discuss whether a rise in economic growth rates is a good indicator of improvement
in standard of living. [13]


5 (a) The Singapore government is committed to achieve full employment. Explain this
statement. [10]

(b) Discuss the policies adopted by the government to reduce unemployment in
Singapore. [15]


6 (a) How relevant is the theory of comparative advantage in explaining Singapores
trade pattern? [12]

(b) Discuss whether protectionism offers any advantages over specialisation. [13]


3
Question 1
At just over $130 a barrel, the price of crude oil has doubled in around a year. In order
to safeguard the state budget, President Susilo Bambang Yudhoyono signalled early
this month that the government will cut fuel subsidy.
-International Herald Tribune, 23 May 2008
(a) Account for the recent sharp increase in the world price of oil. [12]

(b) Discuss how a reduction in the fuel subsidy would impact Indonesians. [13]

Part (a)
There are both demand and supply factors to account for the increase in the world price of oil.
The nature of oil contributes to explaining the massive increase in the price.

Demand factors
Global economic expansion
Rising industrialisation
Speculation

Supply factors
OPEC strategy of increasing supply
Supply disruptions due to political uncertainties and natural disasters

The phenomenal increase in the price of oil within a year implies that the increase in demand
is likely to be greater than the any increase in supply. [Illustration]

The sharp increase in price can be accounted for by the inelastic demand and supply of oil.
Highly inelastic demand for oil- There are few substitutes as the alternatives are hard to
store and do not lend themselves easily to use in vehicles. The lack of close
substitutes results in a highly inelastic demand for oil.
Highly inelastic supply of oil -A long time is required for oil fields exploration and
building of oil platforms.
[Illustration of increase in an inelastic demand against an elastic vs an inelastic supply curve.]

Part (b)
The impact of the reduction of fuel subsidy can be discussed from the point of view of the
consumers, producers and the economy as a whole.

Consumers
Reduction in fuel subsidy will shift the supply of fuel left, resulting in an increase in the
prices of fuel.
Increases in oil prices will fuel inflationary cost push pressures, which adversely affects
living standards.
[Evaluation] The effect on the qualitative aspects of SOL has to be considered.

Producers
Higher oil prices will increase cost of production and reduce marginal profits. Producers
who cannot pass on the increased cost to consumers will shut down.
[Evaluation] The extent of the fall in quantity demanded due to an increase in price
depends on the price elasticity of the good or service. If the demand is price inelastic,
the effect on marginal profit is insignificant.
As real incomes decline due to an increase in cost of living, demand for most goods
and services will fall, resulting in declining production.
[Evaluation] The extent of the fall in demand depends on income elasticity of the goods
or services.



Economy in general
Consumers over-consume and producers over-produce when the price of fuel is
artificially low, creating a misallocation of economic resources.
Cost push inflation discourages production and investment. This results in a fall in
national income falls through the multiplier, increasing cyclical unemployment.
Reduction in fuel subsidy will help Indonesia reduce its budget deficit. This will bring
about greater economic growth as the national debts and burden on future generations
is reduced.
[Evaluation] The extent of effect on national income depends on the size of the
multiplier.
[Evaluation] The extent of effect on unemployment depends on the nature of industries.
[Evaluation] Whether or not there would be economic growth in the long run depends
on the governments use of funds.


Mark Scheme for Part (a)
L3 Well developed economic analysis of demand and supply forces
that interact to cause an increase in the price of oil. Price elasticity
concepts must be used to explain the sharp increase.
9-12
L2 Undeveloped economic analysis of demand and supply forces that
interact to cause an increase in the price of oil.
5-8
L1 Smattering of valid points not classified under demand and supply
factors.
1-4


Mark Scheme for Part (b)
Knowledge, Application and Analysis
L3 A well-balanced discussion addressing the requirements of the
question.
7-9
L2 A reasonably developed answer that explains the impact of a
reduction in subsidy on some sectors of the economy or the
macroeconomic variables. No or limited evaluation of the effects on
Indonesians.
5-6
L1 An answer that shows some knowledge but does not address the
requirement of the question. Basic errors of theory or an
inadequate development of analysis is evident.
1-4
Evaluation
E1 For an unexplained evaluative discussion on effects on Indonesians
due to fuel subsidy cut.
3-4
E2 For a supported evaluative discussion on Indonesians due to fuel
subsidy cut.
1-2














4
Question 2
(a) Explain what factors affects price and output of a firm in the telecommunications
industry. [10]
(b) Discuss whether this model of market structure is the most appropriate to explain
the behaviour of firms in Singapore. [15]

Part (a)
Telcos displays characteristics of oligopoly, i.e. few dominant firms, e.g. in Singapore, market
divided between Singtel, M1 and Starhub. High barriers to entry, i.e. large start up capital,
extensive EOS hard for newcomers to join market.

Body
Telcos in Singapore - price setters, but mutual interdependence between firms, hence action of
one firm will have significant effect on rivals. Different outcomes on price and output can occur,
depending on assumption made about the firms' behaviours.

Collusion (called collusive oligopoly): To raise prices and restrict output in same way as monopoly.
E.g. informal collusion, market leader sets prices and other producers follow (price leadership
model). Prices determined by the price leader and rival firms watch these prices, keeping them
the same.

Competitive, or non-collusive: Firms compete with rivals to gain bigger market share. Price and
output determination shown using kinked demand curve model. Assume firms match price cuts by
other firms but not price increases. Fig 1, firm's price and output set where MC cuts MR (profit
maximising point) If one telco were to price, rivals will not follow suit and firm will experience in
TR. If firm price, rivals likely to follow suit. Even with change in marginal cost, MC still cuts MR
at discontinuity, and thus price and output remains unchanged.
Revenue/Cost
Output
D
2
D
1
0
A

P
0
Q
0

E
2
MC
2
MC
1

E
1
MR



Figure 2: Equilibrium of a competitive oligopolistic firm and price rigidity

Hence, kinked demand model predicts price and output is rigid in competitive oligopolistic
telecommunications industry, showing that mutual interdependence and strong competition are the
key factors in determining the price and output of the firms.

However, above analyses assumes firms want to maximise profits. Firms may choose other aims,
e.g. maximise sales or output Firm chooses to set prices temporarily below profit maximising
level to expand output and gain market share and to drive out rivals in the market.
Part (b)
Requirement: Need to consider how easily oligopolies can be found in Singapore, whether
conditions favour their existence and lastly, the prevalence of other forms of market structures,
e.g. monopolistic competition and monopoly.
5
6
Oligopoly is highly desirable form of market structure for sellers (most firms would want to face
less rather than more competition)

High entry barriers - Substantial EOS (hence very large MES) due to high start up costs, e.g.
telecommunications industry and petrol retailing. Only three firms dominate telco industry, i.e. M1,
Singtel and Starhub; and four petrol retailing firms: Shell, ExxonMobil, Caltex and SPC.

Firms earn supernormal profits in long run - reduce entry of new firms through limit pricing or
predatory pricing, and advertising, R&D e.g. NTUC Fairprice, Carrefour, Giant and Shengsiong
(supermarket industry); cinema chains such as Golden Village, Shaw and Cathay.

Increased globalisation and liberalisation - e.g. financial market, merger of local banks threatened
by entry of foreign MNCs, e.g. DBS bank with POSB, UOB with OUB and OCBC with Keppel-Tat
Lee. EOS and better reputation enjoyed improved ability to compete with international banks.

Government's policies - e.g. privatisation and deregulation of previous state-owned industries, e.g.
Singtel, SingPost. Governments favour oligopolies over monopolies.

However, hawker food stalls, hair salons etc, fit into MPC structure - large number of small firms
selling differentiated products; low entry barriers. Also natural monopolies e.g. public utility
providers (Singapore Power and Public Utility Board), and firms that produce strategic goods, e.g.
money (i.e. Singapore Mint) and military equipment - protected by legislation.

Mark Scheme for Part (a)
L3 Answer shows wide and detailed knowledge of relevant economic analysis,
correctly applied to an oligopolistic telecommunications market. For top
marks, answer must address both collusive and competitive oligopoly
markets.
7-10
L2 An underdeveloped explanation, or with inadequate reference to the
telecommunications industry. Answer recognises market structure in which
telecommunications firms exist but may be unable to show how price and
output is determined in such a market structure.
5-6



L1 A brief explanation or with obvious conceptual errors. Or an answer based
on general demand or supply factors that influence price and output.
Answer does not recognise significance of market structure for
telecommunications firms.
1-4

Mark Scheme for Part (b)
Knowledge, Application and Analysis
L3 A well developed answer that demonstrates both good analysis and
application to the Singapore economy, with wide range of relevant
examples given to support analysis.
9 - 11
L2 An undeveloped explanation of the dominant market structures that can be
found in Singapore. Answer may display poor application to Singapore, e.g.
lack of relevant examples to support the analysis.
6 - 8
L1 An answer that shows some descriptive knowledge, or gives a few relevant
examples of firms in Singapore but does not address the requirement of
the question. Basic errors of theory are evident.
1 - 5
Evaluation
E2 For a well analysed judgment on the appropriateness of a particular market
structure in explaining Singapore's firms as a whole. A clear conclusion
must be reached.
3 4
E1 For an unexplained judgment on which market structure is the most
appropriate for explaining the behaviour of Singapore firms.
1 2



Question 3
The Singapore government has achieved great success in making the city clean and green
by setting stringent emission regulations, implementing strict laws governing disposal of
waste and littering, planting trees and shrubs along roads and overhead bridges, building
park connectors, and having a network of drains and canals.

a) Explain the sources of market failure based on the above statement. [12]
b) Discuss whether the Singapore government currently adopts the most appropriate
economic policies to improve the quality of the environment. [13]

Part (a)
Introduction
There are many aspects of a clean and green city such as clean air and clean water as well as
insignificant amount of litter and waste in public places, lush greenery all around, smooth flow of
traffic, etc.

Identify the sources of market failure base on the above statement: the presence of negative
externalities like air pollution, waste and litter, positive externalities and public goods in the form of
park connectors, the greenery around and the network of drains and canals.

Explain why waste and air pollution are negative externalities

Define negative externalities
Costs borne by third parties who are not directly involved in the production and consumption of a
good.
Main sources of air pollution in Singapore : burning of fossil fuel for heat generation in industries,
electricity generation and transportation.
Elaborate on why air pollution gives rise to negative externalities.
Elaborate on why domestic and industrial wastes and litter create negative externalities

Explain divergence of MPC and MSC


7














S=MPC
MSC=MPC+MEC
D=MPB =MSB
Quantity of car usage
Price of car usage
Q
m
Q
s
Pm
P
s

Figure 1: Negative Externality due to pollution

Using the diagram above explain why there is market failure




8
Explain public goods such as park connectors, greenery, drains and canals

The market also fails when there are public goods. Public goods are goods that have the
characteristics of non-rivalry and non-excludability.

Non-rival in consumption means that the consumption of a good by one person does not deprive
another of its consumption. These goods can be supplied to one person and yet made available to
others at no extra cost.

Non-excludability means that once a public good is provided for some consumer, who is willing to
pay, the same amount of the good is available to all others. It is impossible to exclude the non-
payer from consuming the good.

Apply the concepts of non-rivalry and non-excludability to those goods.


Due to the characteristics of non-rivalry and non-excludability, the market will not supply these
goods and society would be deprived of the enjoyment of these goods if the production of public
goods like these were left to the market. Hence the market fails.


Part (b)
Answer is very broad. Up to students to decide what policies to adopt to solve what kind of
environmental problems.

Possible answer
To ensure a clean environment by managing wastes
Measures
Govt provision

Govt licensed waste collectors to collect solid wastes and these collectors also provide
recycling services to residents
Govt provides landfills and incinerators to dispose wastes
programmes such as the excessive wastage of plastic bags
Public sewerage system to serve all industrial estates and residents

Public sewerage system: public good and high fixed costs (natural monopoly - another form of
market failure) govt provides
Govt can tax residents for waste disposal

Evaluation
How much to tax?
Based on type of housing. Bigger house/flats charged more. But smaller households may have
more people and therefore more wastes.
Has other objectives : equity

Rules and regulations
Wastewater to be discharged into public sewerage system
Industrial wastewater to be treated before discharged
Anti-littering laws

Campaigns
To encourage waste reduction by actively engaging the public via education

Conclusion
Student must make a judgment

9

Mark Scheme for Part (a)
L3 Clear explanation of the concepts of externalities and public
goods and analysis of why the market fails with respect to those
goods.
9-12
L2 Undeveloped explanation of the different types of market failure. 5-8
L1 For an answer that has some basic correct facts such as an
unexplained list of key features.
1-4


Mark Scheme for Part (b)
Knowledge, Application, Understanding and Analysis
L3 For a good analytical discussion of the various measures with
application applied to the Singapore context. Answers must
cover measures to reduce one type of negative externality and
explains government provision of public goods.
7-9
L2 For an undeveloped explanation of the measures or explanation
of only one aspect of the environment i.e either externalities or
public goods.
5-6
L1 An answer that shows some knowledge of the measures used
for keeping the environment clean, to reduce air pollution or to
reduce traffic congestion.
1-4
Evaluation
E2 For an evaluative assessment based on economic analysis. 3-4
E1 For an unexplained assessment, or one that is not supported by
analysis.
1-2

































Question 4
4a) Using economic analysis, account for the rapid growth of an economy in recent years.
[12]
b) Discuss whether a rise in economic growth rates is a good indicator of improvement in
standard of living. [13]

Part (a)

Demand Factors (Shifts of AD)
AD comprises C, I G, (X-M). In case of China, all components have been growing strongly.

- Investment: FDI due to huge domestic market and recent entry into WTO greater access
to export markets. Attractive destination for outsourcing, and positive business sentiments.
- Net Exports: demand for Chinese goods due to China's CA in labour-intensive industries,
recent entry to WTO and weak Chinese yuan.
- Consumption: household wealth and employment.
- Government: infrastructural development, education and R&D. Also to help attract FDI.

Supply Factors (Shifts of AS)
- Rise in capital and technology due to FDI: transfer of technology, management and
marketing skills into China.
- Government spending on infrastructure, education and healthcare.
- Rise in entrepreneurship, through measures to encourage private enterprises.

Both an increase in AD and AS caused rightward shift of curves from AD
0
to AD
1
to AD
2
, and AS
0

to AS
1
. Real GDP increased from Y
0
to Y
2
showing that China has experienced rapid economic
growth.
AD
1
AD
2
0
Figure 1
Y
0
Y
1
Y
2

AS1 AS2
AD
0
GPL




P
1

P
0





Real GDP


Part (b)

Explain how rising economic growth rates indicate improvements in SOL in China
The quantitative aspect of SOL is normally measured by the amount of goods and services the
people can enjoy, i.e. their material well being. NY quantity of goods and services
produced and available for consumption; rise in purchasing power.

Explain how rising EG cannot accurately reflect changes in quantitative aspect of SOL
- Differences in accuracy of data, especially in less developed countries like China, due to
large, illiterate population
- Change in size of non-monetized sector or underground economy
- Worsening income distribution: as China moves towards more capital-intensive manufacturing,
some people find their jobs replaced by machines and their skills no longer relevant. The
unemployed will end up taking low-paid, unskilled work.
- Rise in production does not equal consumption - China's growth largely driven by growth in
investments and exports, does not benefit domestic consumers in terms of quantity of goods
and services.

10
11
Explain how rising EG cannot reflect changes in qualitative aspect of SOL
The qualitative aspect of SOL in a country is measured by infant mortality rate, level of healthcare,
quantity of leisure, crime rates, level of education and many other factors.

- Rise in stress levels: with more urbanisation and industrialisation.
- Deterioration of the environment due to externalities such as pollution: China has 16 of the 20
most polluted cities in the world.

Conclusion
In conclusion, a rise in China's economic growth rates can help to indicate higher living standards
in the country in terms of the quantitative aspect. To fully ascertain if qualitative aspects have also
improved, we would also need to look at other indicators.

Mark Scheme for Part (a)
L3 Thorough explanation of both demand and supply factors, with
good application to an economy. For top marks, candidate must
clearly address the idea of rapid growth, e.g. by bringing in the
multiplier-accelerator effect, or showing combined effect of
components of AD. Credit can be given to students who evaluate
relative importance of factors.

9-12
L2 Detailed explanation, with reference to the context of an economy,
on how either demand factors or supply factors influence growth
rate; or underdeveloped explanation of both, but with a reasonable
attempt at applying to an economy.

5-8



L1 Brief explanation with conceptual errors, of how generally demand
or supply factors influence growth rate.
1-4


Mark Scheme for Part (b)
Knowledge, Application, and Analysis
L3 A well developed answer that explains the measurement and
conceptual limitations in comparing SOL over time using national
income statistics such as economic growth rates. Answer shows
good application to the context of an economy.

7 - 9
L2 An undeveloped answer that explains the measurement and
conceptual limitations in comparing SOL over time using national
income statistics such as economic growth rates. Candidate may
also have considered the NY statistics GDP instead of GDP growth
rates, as given in the question.

4 - 6
L1 An answer that shows some knowledge of limitations but does not
address the requirement of the question. Basic errors of theory are
evident, e.g. considering comparison over-space instead of over-
time.
1 - 3
Evaluation
E2 For a well supported judgment on the usefulness of economic
growth rates as an indicator of rising SOL.

3 4
E1 For an unexplained judgment on the usefulness of economic
growth rates to indicate rising SOL.

1 2



12
Question 5
(a) The Singapore government is committed to maintain full employment.
Explain this statement. [10]

(b) Discuss the policies adopted by the government to reduce unemployment in
Singapore. [15]

Part (a)

Full employment is a situation whereby everyone in the employable age group who is willing
and able to work at the existing wage rate is able to find gainful employment. The Singapore
government is committed to maintain full employment because high levels of unemployment
has undesirable effects.
Wastage of scarce economic resources: Economy below full employment is producing
below productive capacity- hours that the unemployed do not work can never be
recovered.
High fiscal cost: An increase in unemployment results in higher benefit payments and
lower tax revenues. This may result in higher government borrowing in the current
period, which will translate to greater public debt that will place a burden on the future
generation.
Increase in social problems: Rising crime, increased divorce rates and worsening
health.
Achieving full employment is especially pertinent in Singapore because
Labour and human capital is our only resource
Costs of being unemployed is especially high No unemployment benefits
There is no subsistence farming in Singapore for the unemployed.
Part (b)

Unemployment in an economy can be in the form of cyclical (demand deficient) unemployment,
structural unemployment, as well as frictional unemployment.

Demand management policies in the form of fiscal policy and monetary policy influence the level of
aggregate demand (AD), hence they can be used to reduce cyclical unemployment brought about
by a fall in AD during the downs of business cycles.

Explain how the expansionary process of fiscal policy reduces unemployment
Effectiveness: Time lags, small multiplier, problem of budget deficit

Explain how the expansionary process of monetary policy reduces unemployment
Effectiveness: No control over interest rates, Unresponsiveness of consumers and
producers

Explain how Singapores exchange rate policy prevents cost push inflation to boost
exports.
Effectiveness: Confidence in the strength of SGD, difficulty in estimating the extent of
intervention.

These policies are only effective in addressing cyclical (demand deficient) unemployment.
Problem of structural unemployment has to be solved with supply side policies.

Explain how government encourages retraining and upgrading
Effectiveness: Depends on level of education, age, and personal inclination; Requires large
amounts of funds; Uncertain results

Explain how wage reforms allows the firms to tide through bad times without retrenching
workers
Effectiveness: Not adopted by most private firms yet; Requires proactive steps on
employers

Frictional unemployment arises because of the time required to match job seekers with job
openings due to imperfect information. To reduce frictional unemployment, the government can
increase information flow through the setting up of labour exchanges, hence increasing the rate at
which workers are matched to suitable jobs. Given the use of technology, the information gaps can
be quickly filled up today.

Conclusion
To reduce unemployment, a combination of policies is necessary.


Mark Scheme for Part (a)
L3 Well developed explanation of the benefits of full employment or the costs of high
unemployment in the context of Singapore.
7-10
L2 Undeveloped explanation of the benefits of full employment or the costs of high
unemployment. Candidate fails to explain why unemployment is a pertinent
problem in Singapore.
4-6
L1 Descriptive understanding of full employment or smattering of valid points on the
effects of unemployment.
1-3

Mark Scheme for Part (b)
Knowledge, Application, and Analysis
L3 For a well developed explanation of both demand management policy and supply
side policies and how they reduce unemployment in Singapore.
9-11
L2 For a correct but undeveloped explanation of both demand management policy
and supply side policy and how they reduce unemployment.

Or a well developed explanation of demand-side or supply-side policy and how it
reduces unemployment.
6-8
L1 For an answer that shows some knowledge e.g. descriptive knowledge of the
types of unemployment or policies. Basic errors of theory may exist. Does not
appear to have grasped the meaning of the question.
1-5
Evaluation
E2 Supported judgment on the effectiveness of policies to reduce unemployment in
Singapore.
3-4
E1 Unsupported judgment on the effectiveness of policies to reduce unemployment in
Singapore.
1-2

















13
14
Question 6
(a) How relevant is the theory of comparative advantage in explaining Singapore's trade
patterns? [12]
(b) Discuss whether protectionism offers any advantages over specialisation. [13]

Part (a)

Introduction
Define theory of CA.

The theory of CA is relevant to explain Singapore's trade patterns
- Singapore's main exports: high-tech manufacturing, e.g. chemical products, biotechnology,
pharmaceutical products, and in services like banking. Singapore has skilled labour force and
abundance of capital and technology. Hence, CA in the areas of high-tech, capital intensive
manufacturing and services.
- Singapore imports from Vietnam, Cambodia, and Australia for agriculture, commodities and
also manufactured goods low value-added goods such as toys, shoes, textiles countries
with abundance of unskilled labour or well-endowed with land.
- Globalisation has lead to rapid changes in CA for many countries - Singapore moved away
from industries that she had lost CA and moved to new niches such as water and energy
technology, biotechnology, education and interactive and digital media.

Other possible explanations for Singapore's trade patterns
- The theory of comparative advantage is based on the assumption of zero transport costs and
that no trade barriers exist at all, which is unlikely to be the case in real life.
- Trade patterns are also influenced by protectionism measures. More trade tends to take place
with countries that Singapore has signed free trade agreements (FTAs).
- Singapore's largest trading partner is Malaysia, which does not have CA in all the goods that
Singapore now imports - shows that proximity, and hence lower transport costs, also affects
Singapore's trade patterns.

Other factors affecting Spores trade patterns include exchange rates (e.g. undervaluation of the
Chinese yuan); differences in tastes and preferences (which can account for intra-industry trade in
goods which countries have the same CA in producing, e.g. electronic products) etc.

Part (b)

Introduction
- Define protectionism and specialisation.

Advantages of Specialisation and Trade
- Leads to increases in world production and higher consumption for countries as outlined by the
theory of CA (more efficient allocation of resources)
- Allows for greater economies of scale to be reaped due to increased output from specialisation;
as well as greater efficiency due to competition from foreign goods.

Advantages of Protectionism
Increase of domestic production and employment
- Countries able to increase their domestic production and employment. Without protectionism,
some local industries may be edged out by foreign producers resulting in a fall in employment.
- [Evaluation] Loss of societal welfare due to higher prices and lower quantity, leads to higher cost
of production for other domestic producers.
- [Evaluation] Perpetuates domestic inefficiency and lead to LR disadvantages as domestic firms
do not find incentive to improve to compete in the international markets.
- [Evaluation] Makes trading partners poorer which reduces ability to import goods from protected
countries, and in turn adversely affect their exports and employment level.



15
Infant industry argument (Developing new niches)
- Countries diversify into new niche areas of potential CA e.g. Singapore into the services sector
country prepares itself if existing goods lose CA. Without protection infant industries may not get
off ground despite being potentially profitable in the long run.
- [Evaluation] Firms receiving protection remain perpetually as infants as they remain complacent
- [Evaluation] Government may have incorrectly chosen industries, leading to wastage of
resources,

To reduce balance-of-payments deficit due to large import expenditure
- Persistent BOP deficit means a depletion of foreign reserves. A government may hence resort to
protectionism, instead of specialisation and trade, to reduce imports.
- [Evaluation] Short term measure as protectionism does not remove the root cause of the deficit,
which is the lack of growth in its exports.
- [Evaluation] Protectionism invites retaliation from trading partners.

Reducing vulnerability of economy to market demand and supply changes
- Specialised industries vulnerable to economic changes, e.g. changes in world demand.
- Heavy dependence on foreign supply of other goods and may run the risk of not being able to
obtain essential imports if trade is disrupted. Countries which specialises in primary products
experience wide fluctuations of income due to the nature of such products.
- [Evaluation] Reduction in volume of international trade will decrease. However, some degree of
diversification is justifiable if it ensures more stability in the economy.

Conclusion
Protectionism can offer certain advantages over specialisation, especially in the short run.
However, many of these arguments are debatable when seen from the long run perspective.

Mark Scheme for Part (a)
L3 Thorough assessment, with good analysis as well as application, on
whether the theory of CA is relevant for explaining Singapore's trade
patterns. Relevant examples are given to support the answer. For
top marks, an attempt at reaching a conclusion must be made.
9 - 12
L2 Detailed explanation of the relevance of the theory of CA in the
context of Singapore's exports and imports, but inadequate
consideration of other possible determining factors; OR an
underdeveloped explanation of a range of possible factors.
5 - 8


L1 Brief explanation of theory of comparative advantage, with
inadequate attempt at addressing the requirement of the question.
1 - 4

Mark Scheme for Part (b)
Knowledge, Application, and Analysis
L3 For a well-developed explanation & discussion of advantages arising
from protectionism, with a comparison against the gains from
specialisation and trade.
7 - 9
L2 For a reasonably developed explanation of the gains from
specialisation and trade, OR the arguments for protectionism; or an
undeveloped analysis of both.
4 - 6
L1 For an answer that shows some knowledge of the arguments for
protectionism but does not address the requirement of the question.
Errors are evident in the answers.
1 - 3
Evaluation
E2 For a well supported judgment on whether protectionism is ever
advantageous over specialisation, considering short vs. long run, etc
3 4
E1 For an unexplained judgment on whether protectionism offers
advantages over specialisation.
Up to 2 marks if evaluation is given for all points but there is no
overall conclusion.
1 2