HWA CHONG INSTITUTION

College 2 Preliminary Examination 2009

General Certificate of Education Advanced Level
Higher 1

ECONOMICS

8819/01
14 September 2009
3 hours

Additional Materials: Answer Paper

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Write in dark blue or black pen on both sides of the paper.
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Section A
Answer all questions

Section B
Answer one out of two questions.

At the end of the test, fasten your answers securely together.

The number of marks is given in brackets [ ] at the end of each question or part question.
For Section A, you are advised to spend several minutes per question reading through
the data before you begin writing your answers.

This document consists of 10 printed pages in all.

HWA CHONG INSTITUTION

HCI C2 Prelim 2009

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[Turn over

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SECTION A
Answer all questions in this section.

Question 1
Extract 1: Renewable energy
In recent times, interest in clean energy production has swelled tremendously with many
governments and corporate sectors attempting serious investments in clean energy and
sequestering carbon emissions resulting from their businesses. Singapore is part of the
Renewable Energy and Energy Efficiency Partnership (REEEP), an international alliance
consisting of governments, businesses and organizations, started in 2004 to accelerate and
develop the sustainable energy market globally.
The efficiency of solar photovoltaic (PV) systems has improved dramatically. PV systems
convert the suns light energy directly into electricity. In some developed countries, use of
PV is already a viable alternative. The biggest urban market will be rooftop and building
integrated PV. These take advantage of the inherent strengths of PV as a localized power
supply by integrating it into the very building that will consume its electrical output. Also,
rooftops are free real estate for installing building integrated PV systems as it does not
consume additional land resources. With 60 to 100 km2 of total roof area, installing PV
systems on these spaces could generate 39% of electricity that was consumed in 2005
without emitting any greenhouse gases.
In an effort to boost the use of PV energy, the Singapore government recently announced a
subsidy of S$20 million.
Worldwide, the average price for PV energy, excluding installation and other system costs,
has dropped from almost US$100 per watt in 1975 to a projected rate of US$2 per watt in
2010. At this point, solar PV energy will become competitive with coal-fired electricity.
Adapted from Elements 2007 Issues 2 and 3

Chart 1: World Annual Photovoltaic Production, 1975 - 2007

Adapted from 27 Dec 2007 Earth Policy Institute

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Extract 2: Singapore Identifies Opportunities in Clean Energy
Climate change, high oil prices, and global concerns about energy security -- these are
prime factors fuelling the new wave of investment in alternative energy.
Singapores aim is to be a global hub where clean energy products are developed, made,
and exported overseas. In 2008, the Singapore government identified the Clean Energy
industry as a strategic growth area for our economy. Since then, the city-state has begun to
implement a comprehensive blueprint to grow the industry, starting with an initial funding
support of S$350 million from the government. This blueprint comprises five key pillars:
R&D, developing manpower, grooming Singapore-based enterprises, branding the industry
internationally, and growing a vibrant industry ecosystem.
To synergise efforts to grow the industry, the Clean Energy Programme Office (CEPO) was
formed. CEPO is an inter-agency workgroup comprising different governmental agencies
and is responsible for planning and executing strategies to develop Singapore into a global
clean energy hub.
Manufacturing solar wafers, cells and modules has many parallels with semiconductor and
electronics manufacturing processes. Singapores position as a major semiconductor hub,
coupled with all-round capabilities from the precision engineering and chemicals industries,
allows us a headstart in the solar industry. In addition, Singapore is an efficient base for
companies keen to develop potential cutting-edge clean energy solutions tailored for Asia
given its excellent supply chain capabilities and linkages to the region. For instance, there
are about one billion people across Asia without access to grid electricity which represents
an untapped market for solar power.
A few leading solar players are setting up their regional headquarters in the Republic. In
January 2008, Swiss-based Oerlikon Solar, a leading supplier of equipment for
manufacturing thin-film solar cells, chose to locate its Asian manufacturing and R&D hub in
Singapore. However, the biggest highlight is Norway's Renewable Energy Corporation,
which is establishing the world's largest solar manufacturing complex in Singapore. The first
phase is about S$3 billion in investment value. It will hire about 1,300 employees when it
begins operations in early 2010 to produce silicon wafers, solar cells and solar modules.
When the complex is fully developed, Renewable Energy Corporation could produce up to
1.5GW of solar products in Singapore for global markets. Moreover, top talents have been
attracted to work in Singapore and be part of Singapores aspirations to become a
Cleantech hub. One such talent is Dr. Bram Hoex from the Netherlands. When Dr. Hoex
first visited Singapore to get a feel of the place, he was impressed by its positive business
climate and the willingness of the Singapore Economic Development Board (EDB) to invest
in viable opportunities.
By 2015, the Clean Energy industry is expected to contribute S$1.7 billion to Singapores
gross domestic product and create 7,000 jobs across a broad range of areas, including
solar power, fuel cells, wind power, energy efficiency and carbon services.
Source: Adapted from Singapore EDB Website

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Tasks
(a) (i)

With reference to Chart 1, explain why the price of photovoltaic (PV) energy [2]
is expected to drop in 2010.

(ii) Analyse how the entrance of PV energy is expected to impact the demand for [4]
coal-fired electricity.
(b) (i)

Define the term merit good.

[1]

(ii) Explain how social allocative inefficiency will result in the market for PV [4]
energy.
(iii) Evaluate the Singapores government policy of using subsidies to overcome [6]
the market failure.
(c) (i)

Explain why Singapore might have a potential comparative advantage in the [3]
production of clean energy.

(ii) In the light of an increasingly globalised world, discuss the potential benefits [10]
and threats pertaining to Singapores strategy of developing clean energy for
export.
[30 MARKS]

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Question 2: Dealing with the Global Recession
Extract 3: Building Britains Future
In response to the steep and synchronised global downturn, the UK Budget 2009
announced a package of measures that will support the adjustment towards renewed
economic growth and improve the UKs competitiveness. A 750 million Strategic
Investment Fund is set up to support advanced industrial projects of strategic importance.
Additionally, a package of reforms to the taxation of foreign profits, including the introduction
of an exemption for foreign dividends, supported by a limited restriction to the interest
deduction rules has been introduced. The current corporate tax rate remains unchanged at
21%.
The UK Budget 2009 also announced further Government action to support employment, by
setting aside an additional 1.7 billion to help savers and families with children, to support
pensioners, and to help people manage their finances. It also aims to implement
guaranteed job trainings or work placements for all 18-24 year olds who have been
unemployed for 12 months, to ensure no young people are left behind due to long-term
unemployment. As part of this, the Government will allocate funding to provide 100,000 new
jobs in socially useful activity and a further 50,000 jobs in areas of dense unemployment
across the country. The guarantee will also offer new training courses, and Community
Work placements.
For this Budget, the Government is delivering fiscal support worth 4% of GDP in 2009-2010,
and the operation of the automatic stabilisers. The Bank of England has cut Bank Rate to
half a per cent and announced a 75 billion programme of asset purchases. With
substantial macroeconomic stimulus already in place, this Budget focuses on further
targeted support for those most affected by the downturn, and on ensuring a sustained and
sustainable recovery, including support for employment and investment.
In the UK, borrowing is forecast to peak at 12.4% of GDP in 2009-2010, before falling as the
economy recovers and the Government takes further action to ensure sustainability. The
Budget also sets some tax and spending measures to reduce borrowing by 26.5 billion by
2013-14.
Source: Adapted from the UK Budget 2009

Extract 4: Protectionism During Recession

The year 2008 has been defined by the worsening global economic climate, with the UK
GDP contracting by 1.5 per cent in the last quarter of 2008 and with unemployment hitting
1.97 million, the focus for the government is definitely on tackling the recession. It's not just
Britain that has to deal with a downturn; the rest of the world is struggling with the global
recession and as this happens there could be a temptation to focus attention inwards rather
than worrying about the constraints of a free market leading to protectionism.
Supporters of protectionism believe that it will save local jobs and help aid declining
industries, while those opposed believe it will cause what Professor Iain Begg from the
European Institute at the London School of Economics and Political Science calls "a major
spiral" where ultimately nobody wins from it. A strong advocate of free trade, Professor
Begg also believes that a sufficient condition for getting rid of protectionist measures is that
all countries act together in trying to deal with the causes of the recession and impose the
appropriate macroeconomic policies. "Protectionism will only impede economic recovery
and breed retaliation amongst trading countries," he says.
Source: Adapted from www.politics.co.uk, 01 Mar 2009
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Extract 5: Singapores Monetary Policy
The Monetary Authority of Singapore (MAS) tightened the monetary policy stance in
October 2007, by allowing a slightly steeper appreciation of the S$ nominal effective
exchange rate (S$NEER) policy band. This was followed by an upward movement of the
band to the prevailing level of the S$NEER in April 2008. Both external and domestic price
pressures had strengthened as a result of rapid increases in global commodity prices and a
build-up in domestic cost pressures.
In October 2008, MAS shifted to a zero per cent appreciation of the S$NEER policy band,
eliminating the crawl which had been in place since April 2004. The decision reflected the
moderation of inflation from its peak in mid-2008, and also the higher risk of a further
deterioration in the external outlook after September 2008, following the escalation of
turbulence in global financial markets.
Singapores monetary policy has also been complemented by its fiscal policy. In the latest
Budget 2009, a $20.5 billion Resilience Package was unveiled. This expansionary Budget,
which featured the Jobs Credit Scheme, aimed to save jobs, enhance the cash flow and
competitiveness of firms, support families, and strengthen the economys long-term
capabilities through the Skills Programme for Upgrading and Resilience (SPUR). At the
same time, there was a reduction of corporate income tax rate from 18% to 17%. The
coherent and complementary nature of these macroeconomic policies, together with the
numerous Free Trade Agreements signed over the past few years, will not only provide a
buffer against the present downturn, but also help to achieve economic stability and the
main macroeconomic objective of sustained growth for Singapore.
Source: Adapted from MAS Annual Report 2008/09

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Table 1: The Singapore Economy: selected economic indicators 2005-2009

GDP, at current market price

(S$ bn)
GDP, at 2000 market prices
(% change)
Inflation (% change)
Unemployment rate (%)
Productivity Growth
(% change)
Current account balance
(% of GDP)
Capital and Financial Account
Balance (S$ bn)

2005

2006

2007

2008

2009*

201.3

221.1

251.6

257.4

240.9

7.3

8.4

7.8

1.1

8.8

0.5

1.0

2.1

6.5

0.1

3.1

2.7

2.1

2.2

3.6

2.8

1.6

0.8

7.8

8.7

23.8

26.4

25.2

15.2

15.5

29.7

35.1

33.9

16.2

35.8

*forecast as at 2Q 2009
Source: various

Table 2: The UK Economy: selected economic indicators 2005-2009

GDP at current market price

( bn)
GDP at 2000 market prices
(% change)
Inflation (% change)
Unemployment rate (%)
Productivity Growth
(% change)
Current Account Balance
(% of GDP)
Capital and Financial
Account Balance (bn)

2005

2006

2007

2008

2009*

1,252.51

1,321.86

1,400.53

1,442.92

1,413.79

2.1

2.8

3.0

0.7

-4.1

2.1

2.8

2.0

3.9

0.8

4.8

5.4

5.4

5.6

7.4

0.8

2.4

2.3

0.5

2.4

2.6

3.4

2.9

1.7

2.0

687.3

571.9

995.7

655.2

na

*forecast as at 2Q 2009
Source: various

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Tasks
(a)

Summarise and account for the changes in the S$NEER since October
2007.

[5]

(b)(i)

Explain one protectionist measure that can be adopted by the UK

government to save local jobs.

[3]

(ii) Discuss the view that ultimately nobody wins from protectionism.

[6]

(c)

Consider whether the data would lead you to expect a further deterioration
in the balance of payments of Singapore in 2009.

[4]

(d)

Discuss and compare the choice of growth policies adopted by Singapore

and the UK in response to the current global downturn.

[12]

[30 MARKS]

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SECTION B
ESSAY
Answer one out of two questions in this section.

Air travel for leisure purposes is growing worldwide and is set to skyrocket over the
coming decades. However, aircraft emissions are one of the fastest growing
contributors to global warming. In an effort to control pollution, the European Union
plans to impose the carbon trading scheme on the air travel industry.
(a) Explain the factors that influence the market demand for air travel.

[10]

(b) Discuss whether the carbon trading scheme would be effective in correcting the
negative externalities arising from air travel.
[15]

4(a)

Explain what might cause an appreciation of a countrys currency in a floating

exchange rate system.
[10]

(b) Discuss how the Singapore government might use the concept of price elasticity of
demand to determine the impact of an appreciation in exchange rates on the current
account of the Singapore balance of payments.
[15]

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Copyright Acknowledgements:
Extract 1
Extract 2
Extract 3
Extract 4
Extract 5

Elements 2007 Issues 2 & 3

Singapore EDB website

Chart 1

Earth Policy Institute, 27 Dec 2007

UK Budget 2009
www.politics.co.uk, 01 Mar 2009
MAS Annual Report 2008/09

Permission to reproduce items where third-party owned material protected by copyright is included has been sought
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any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the
earliest possible opportunity.

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