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HCI 2009 Prelim H2 Econs Case Study Suggested Answers

Question 1
(a)

(i)

Describe the trend in car traffic volume in UK from 1950 to 2008.

[2]

From Figure 2, car traffic volume increases (1m) at a decreasing rate (1m).
OR
From Figure 2, although volume of car traffic has grown since 1950 (1m), the
actual rate of growth has been slowing over time (1m).
(ii)

Comment whether the data show that rail passenger numbers will [4]
double over the next 20 years.
Yes (2m)
No (2m)
From Extract 1, para 1,
From Figure 2, road
congestion situation may
Worsening road congestion
British will turn to substitute like
not worsen as the traffic
rail service which cuts back on
volume growth has been
travelling time.
on a decreasing trend
and averaged at about
The
expansion
of
urban
1% only in the last 5
employment more populated
years.
cities naturally means more
potential passengers for rail
From Extract 1, para 1,
service.
trains tend to be overcrowded
and
heavy
Green concerns British turning
schedule of trains also
to more environmental friendlier
resulted in huge delay
travelling mode such as rail
whenever a train breaks
service.
down.
From Extract 2,
Extract 1, 2nd last para,
fewer than half of
Railway reforms will increase the
passengers think the
number of train carriages and size
trains are good value as
of the railway platforms, easing
price of rail service
the congestion situation. These
continues to rise.
improvements may make rail
travel a more attractive option and
Rail reforms, which seek
attract back consumers who were
to shift the burden from
previously put off by the
taxpayers
to
ticketovercrowding situation.
holders will, and firms
being given autonomy to
raise unregulated ticket
All the above will increase the demand
prices, etc will cause rail
for rail service.
ticket prices to increases,
discouraging passengers
From Figure 1, passenger journeys bn
from taking the train.
per km almost doubled in the last 10
years.
.
More passengers will turn to
alternatives such as cars.
1

Judgment:
Overall, rail passenger numbers will increase due to a mere increase in
population. However, if rail services continue to be substandard while price
continues to rise, the growth in passenger number may be much lesser than
predicted.
Note:
Full marks are awarded for a balanced view with evidence from
BOTH extracts and figures and also attempt to elaborate.
Max. 3m is awarded if candidates failed to elaborate OR only used
evidence from either extracts or figures.
Max. 2m is awarded if candidates gave one-sided answers.
Candidates are not expected to give all the possible
reasons/evidence and a final stand.
(b)

(i)

Explain and illustrate with a diagram the profitability of Britains national [6]
railway network.
Identify profitability
Extract 1, para 2, Britains national network has never been profitable
Extract 1, para 3, As rail companies continue to make losses, the official
subsidy has exceeded 4 billion a year.
increasing subnormal profit. (1m)
Why subnormal profits?
Increasing variable costs (1m):
Extract 1, para 2: in recent years, costs have exploded due to rising
fuel costs.
Demand increase but outpaced by the increase in costs (2m)
Demand increase (1m):
Figure 1: overall increasing trend for passenger traffic.
Increase in demand slowing down (1m)
Extract 1, para 1, passenger growth has slowed due to the
recession.
Extract 1, para 2 drop in passenger growth.
Figure 1 shows the increasing rate has slowed down.
Note: Full 2m will be awarded for demand factors if the candidates could
justify why demand is rising at a slower rate and not demand has fallen.
Diagram to show increase in AC and MC outweighs increase in AR and
MR and thus a rise in subnormal profits.
2m
1m

Shows a rise in demand (AR & MR) is outstripped by the rise in cost,
with economic loss clearly labeled.
Shows only ONE accurate change in either demand or cost and
economic loss is not labeled.

(b)

(ii)

Evaluate the effectiveness of the Department fro Transports proposal [8]


made to shift the burden from taxpayers to ticket-holders.
Extract 2, para 2, The DfT proposes to shift some of the burden from
taxpayers to ticket-holders, slashing its contribution to 3.2 billion a year by
2009 and hoping that a combination of more passengers and pricier tickets
will boost fare revenue.
Measures
Above-inflation fare

Issue penalty fares

Effective?
Price is adjusted for inflation and will result in
higher revenue if demand for rail service is
relatively price-inelastic. Journey distance,
availability of substitutes, etc will affect the
responsiveness of passengers. Generally, this is
more effective in raising revenue for long
distance travelling where there are few
alternatives.
This is effective provided there is sufficient
enforcement such as regular checks on
ticketless passengers.

This will be more feasible if revenue gained from


this regulation is higher than the administrative
costs incurred.
Firms are free to raise This is a form of price-discrimination.
unregulated ticket prices
(typically, those bought The demand for last minute ticket tends to be
just before travel)
relatively price-inelastic due to urgency and lack
of substitutes.
Thus raising such fares will result in a rise in
fare revenue for the rail companies since
quantity demanded will fall less than
proportionate to an increase in price.
The
possibility
of A price cap is a form of price ceiling in which the
removing price caps on workings of price mechanism is distorted and
regulated fares, such as result in a shortage. A removal of such price
season tickets
caps will result in higher fare revenue.
Note: Though equity is a concern, it does not
affect effectiveness.
Conclusion: Besides, shifting the burden to passengers, it is of paramount
importance that rail service has to be improved to increase patronage
higher demand and thus higher revenue.

L3
L2
L1

(c)

Knowledge, Application, Understanding and Analysis


An excellent and well balanced explanation with good economic
analysis and a conclusion.
Evidence of a more thorough analysis but answer tends to be
lopsided.
Attempted to explain the effectiveness of 1-2 relevant measures but
underdeveloped or little/no economic analysis.

7-8
4-6
1-3

In light of the data provided, if you were an economic advisor to the UK [10]
government, discuss whether the UK government should remove rail
subsidies.
Extract 1, para 3, As rail companies continue to make losses, the official
subsidy has exceeded 4 billion a year since 2006.
No
Without government subsidy,
rail
service
will
be
discontinued

Yes
However, with passenger volumes expected to
rise, (Extract 1, para 1: passenger volumes
estimated to double within the next 20 years),
with higher demand, rail company may earn
It is mentioned in Extract 1, para supernormal profits and thus such
1 that the British rail network as subsidies can be reduced and gradually
a whole has never been removed in the future.
profitable. If the government
does not provide subsidies, the Furthermore, with rail companies given the
rail service may not be provided, autonomy to raise unregulated ticket prices
or only the most profitable ones and practice price discrimination. This will
are kept open. After all, half the increase revenue for firms and turn them
train journeys made in Britain profitable.
involve only 3% of all the
stations (Extract 1, para 6).
Judgment:
The subsidy may not be removed immediately especially during this period of
recession when rail growth has slowed down. It should only be removed gradually
when the economy picks up.
Merit
good/Positive
externalities
As mentioned in Extract 3,
travelling by rail is the least
polluting as compared to other
modes of transport.

Inequitable
As mentioned in Extract 1, para 4, rail
subsidies benefit the better-off the most.
Hence the government shouldnt spend public
money on something that does not benefit the
majority equally.

Hence, travelling by rail rather


than by private cars or even
airplanes can result in lower
carbon emissions per passenger
per mile travelled which may
result in a cleaner and
healthier environment for the
citizens (and reduce health
problems such as asthma

A spokesman said: "The reality is that 6% of


the population travels on railways. So why
should people who don't use railways regularly
fund the people who do?"
Evaluation
Furthermore, with fares rising faster than
inflation and expected to rise further, rail travel
may increasingly be a service enjoyed only by

attacks).

the better off.

Also, more people turning to rail


instead of driving will reduce
congestion
on
the
roads.
Quicker commuting times will
lead to greater productivity as
less time is wasted being
stuck in traffic jams.

Opportunity Costs
Extract 1 states that the official subsidy has
exceeded 4 billion a year since 2006. This
increasing amount of subsidies needed means
less funds for other vital areas such as
education and healthcare.

Extract 1, para 5, Rail journeys account for


just 6% of total travel while roads for 84%, but
subsidising rail consumes around 20% of the
governments transport budget. The same
amount that spent on the west-coast railway
line could have added to around 450 miles of
Furthermore, the existence of motorway.
subsidies may weaken the
incentive for rail companies to Extract 1, last para, Department for Transport
minimize costs.
desperate for funds to keep a clutch of badly
needed projectssuch as a 6 billion roadbuilding programmeon course.
Evaluation
However, in practice, it is difficult
to ascertain optimal amount of
subsidies.

Judgment
With ballooning government debt, subsidizing rail transport is financially draining
on the countrys resources. And given the issue on equity, government should
review its policy to heavily subsidizing rail services.

Conclusion and judgment


The subsidy should be given to improve the quality of rail service as a
long term plan to increase demand.
With the high opportunity cost incurred in rail subsidy and ballooning
budget deficit, the government should reduce subsidy and continue to
ensure the passenger bear more of the costs since the rich are the
frequent passengers.
Knowledge, Application, Understanding and Analysis
An excellent and well balanced explanation with good economic
analysis and reference to context.
L2 Evidence of a more thorough analysis. Able to apply to context but
answers tend to be lopsided.
L1 Attempted to justify whether UK government should remove the rail
subsidy but underdeveloped or little/no economic analysis or no/little
reference to case material.
Evaluation
For judgment based on economic analysis. I.e. taking a stand with
defence.
For judgment without economic analysis.
L3

7-8
5-6
1-4

2
0-1

Question 2
5

(a)

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

[5]

Summary [1m]:
To gain full 1m, students MUST summarise the changes and not provide a cut and
paste account of the changes.
From Extract 3
Gradual appreciation from Oct 07 Oct 08.
Zero percent appreciation from Oct 08 onwards.

Explanation [4m]:
Reasons for pursuing a policy of strengthening the Sing$ [2m]
Reasons for pursuing a policy of zero appreciation of the Sing$ [2m]
(b) (i)

With the aid of a diagram, explain how tariffs on imports can save local jobs in
the UK economy.

[3]

Macroeconomic approach is expected as the cue word UK economy suggests


students should be using macroeconomic analysis.
Diagram [1m]
Show AD increases.
Explanation [2m]
1. Tariffs could be used as an expenditure switching measure to encourage
domestic consumers to switch from buying the relatively expensive imported
goods to the cheaper domestically produced substitutes
2. The collapse in AD due to the fall in exports because of the global recession
could be mitigated by an increase in expenditure on domestically produced
goods and a fall in expenditure on imports assuming demand for imports is
price elastic. In the process domestic firms will hire more workers or retain
existing workers. Hence, jobs are saved
(ii)

Discuss the view that ultimately nobody wins from protectionism.

[6]

Thesis: somebody wins from protectionism


Extract 2 states that protectionism will 1) save local jobs and 2) help aid declining
industries. So students will need to justify these points.
1) Save local jobs: already explained in (b)(i) so no need to explain. Can just
state.
2) Help aid declining industries: in the case of the UK, the infant industry
argument might not apply so much (though to some countries it might). Of
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more significance could also be helping sunset/declining industries from


foreign competition. Some sunset industries have lost comparative
advantage in the production of certain goods to foreign firms. These sunset
industries may face increased financial losses especially during recessions
especially when people become more price conscious, and realise that the
goods from these countries are overpriced. Thus they may face potential
shut-downs. The government may deem it necessary to protect these
struggling industries from mass unemployment. Obviously, the protection
provided is also a buffer for workers in those declining or sunset industries
with the opportunity to retrain and seek employment in other expanding
sectors of economy (buy time for declining industries to restructure).
Anti-thesis:
UK consumer loses from protectionism
UK consumers may have to pay higher prices of goods whether imported or
domestically produced. This would lead to welfare loss in consumption for UK
consumers. Moreover domestic firms tend to become inefficient under protection
and hence consumers end up bearing the costs in terms of welfare losses.
Evaluation: ultimately nobody wins
Retaliation and the eruption of Trade Wars.
Protectionism to save jobs is a beggar- thy- neighbour policy. Hence in the long
run it is likely to breed more protectionism as trade partners retaliate. If this
ultimately erupts into a trade war and becomes widespread nobody wins because
every country would find doors closed to open trade. The volume of international
trade would shrink considerably. Hence, instead of saving jobs there would be
massive unemployment due to the collapse of international trade. Seen from this
light, protectionism which is intended to save jobs would only impede global
economic recovery. The end result is to plunge the world into a prolonged period of
recession with every country in a no win situation.
L3
(5-6m)

For an answer that discusses the disadvantages and advantages of


protectionism, and applies well to the context of recession.
For an answer that explains some of the advantages and disadvantages of
protectionism, without applying to the context of recession.

L2
(3-4m)

L1
(1-2)

(c)

For an answer that only explains the advantages or disadvantages of


protectionism (one-sided) cap at 4 marks for well explained.
A very sketchy answer, with brief / poor explanation of advantages or
disadvantages of protectionism. May state the definition of protectionism
vaguely.

Consider whether the data would lead you to expect a further deterioration in the
balance of payments of Singapore in 2009.
Focus of the question is for students to handle data using statistics from Table 1 to
discuss if indeed Sgs BOP will deteriorate in 2009.
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[4]

Thesis [2m]: Yes, there will be further deterioration in Sgs BOP


Data handling: To calculate and comment on BOP over the timeframe [2m]
Based on data given in Table 1, BOP in 2009 has been forecasted to decline, esp. since
2007.
For students using trends in productivity growth to explain their prediction on Sgs BOP,
without evidence of calculation award 1m

Productivity growth trends have been falling since 2005, with negative growth in
2008. If trend persists, this implies unit cost of production will increase, hence
SRAS shifts to the left, resulting in higher general price levels. Sg exports lose
price competitiveness. Assuming PEDx>1, BOT worsens
Falling productivity growth trends may attract less FDI hence worsening of KA/FA.

Anti-thesis [2m]: No, there will not be further deterioration in the BOP
Any one well elaborated point. Students can also draw evidence from Ext 6 to explain
that with the policies (dd-mgmt, SSP, FTA) in place, it is not likely that BOP will worsen.
Also can accept any evidence from the other extracts, not necessary from Table 1.
Inflation seems to be moderating, from a high of 6.5% in 2008 to an estimated
0.1% in 2009. This means that Singapore exports will be relatively cheaper to
foreigners and assuming PEDx>1, then Singapores export revenue will increase
and improve BOT.
GDP growth at constant prices shows a declining trend. In 2009, this is estimated
to be a fall of 8.8%. This falling trend of GDP growth is likely to continue,
especially given the fact that productivity growth is also expected to fall and given
that it takes time for productivity falls to filter through to GDP, there will be further
deterioration in GDP growth. This is accompanied by an increase in
unemployment rate. Thus, Singaporeans will have less income to spend on
imports. Hence import expenditure decreases and BOT improves. Ceteris paribus,
BOP would improve.
(d) Discuss and compare the choice of growth policies adopted by Singapore and the
UK in response to the current global downturn.
Use data to justify the use of growth policies
1. Real GDP: projected negative for both economies Sg (-8.8%); UK (-4.1%)
2. Increase in unemployment rate Sg (2.2% to 3.6%); UK (5.6% to 7.4%)
3. Productivity: negative growth Sg (worsen to -8.7%); UK (from positive to -2.4%)
4. Inflation: All time low (be careful of possible deflation) Sg (0.1%); UK (0.8%)
SIMILARITIES
(Similar problems caused by the global downturn suggest both countries should
be using a standard set of tools i.e. DSP and SSPs. Students are expected to point
this out clearly )

Fiscal Policy
8

[12]

Evidence [Ext 1 and 3]:


UK million Strategic Investment Fund ( i.e. targeted at the I component of AE)
1.7b to help savers and families with children, to support pensioners (i.e. targeted
at the C component of AE)
Singapore $20.5 billion Resilience Package (expansionary Budget)
Analysis FP:
Since both countries were experiencing a major contraction in AD due to the global
financial crisis both governments needed to undertake measures to address this problem.
One common tool available to all governments is the use of Fiscal stimulus or
expansionary fiscal policy.
G spending is used as a classic pump-priming measure in times of a recession. The
idea is to kick-start spending in a sluggish economy. Hence, the increase in G spending
is aimed at increasing AD or NI via multiplier effects so as to push back the contraction or
decline in aggregate spending.
Limitations of FP:
UK Borrowing to pump-prime the economy is forecast to peak at 12.4% of GDP
in 2009-10 [Ext 1]. This could signal large budget deficits, which could lead to the
crowding out effect on UK private investments. Future generation may suffer as
they will need to service the debt if borrow from abroad
The fiscal stimulus used by Singapore comparatively speaking places very little
focus on pump-priming. The basic reason is because it is off little effect on AE
because of the smallness of our domestic sector as well as the size of the K.
Supply-side Policy
Evidence [Ext 1 and 3]:
UK 750 million Strategic Investment Fund; guaranteed job, training or work
placement; new training courses
Singapore Jobs Credit Scheme; Skills Programme for Upgrading and Resilience
(SPUR)
Analysis of SSP:
The aim is to help businesses stay afloat by subsiding business costs e.g. JCS or/and
build up productive capacity in the longer term.
JCS scheme is a good example of a government sponsored wage-subsidy scheme to
save jobs.
SSP could also be used to mitigate the harmful effects of the recession on employment.
G funds could be used to help the young unemployed find work or retrenched workers
retrain and upgrade their skills in order to improve their employability and find alternative
employment.
Limitations of SSP:
Singapore Jobs Credit Scheme might not be as effective if firms are unprofitable
and unable to cover costs despite the wage subsidy. Moreover this scheme is
difficult to sustain if the recession is prolonged. Surely, public funds cannot be
used indefinitely to artificially keep unprofitable firms on life support in order to
save jobs.
9

The inherent problem with training, skills upgrading and education lies chiefly on
the attitudes of the workers. Additionally, the skills and knowledge attained may
take a while to internalize (long gestation period), this is especially so for the older
workers. With an ageing population, this will be one of the main limitations for UK
and Singapore [contextual knowledge]

DIFFERENCES
Monetary Policy
Evidence [Ext 1 and 3]:
UK The Bank of England has cut Bank Rate to half a per cent
Singapore zero per cent appreciation of the S$NEER
Analysis of MP:
UK MP is interest rate centred. Explain how this will lead to growth.
MAS does not control interest rate. SG chief concern is with the exchange rate.
Elaborate.
In the context of the global recession the zero appreciation policy has a dual
function primarily it is to lend support to our exporters whilst at the same time
provide liquidity support to our financial system by ceasing to intervene to buy up
Sing$ to strengthen the currency.
Limitations of MP:
UK poor economic outlook implies an interest inelastic MEI, plus poor
consumers confidence so C also interest inelastic. Hence lowering of interest
rates will have little effect on raising I and hence AD and Real National Income
Singapore exchange rate policy cannot be used as the sole measure to improve
our exports earnings. In the context of the global recession it can only lend support
to our exporters by taking some pressure off their price competitiveness. At the
end of the day, exporters should look to other ways to improving their non-price
competitiveness e.g. branding etc
Fiscal Policy (tax policy)
Evidence [Ext 1 and 3]:
Tax policy is a component of the overall fiscal stimulus
UK Corporate tax kept the same at 21%. However tax exemption etc allowed for
foreign profits.
Singapore Reduction of the corporate income tax rate from 18% to 17%
Analysis of tax policy:
Both countries appear to aim to attract more investments (FDIs) to create jobs.
Incentives offered however differed. SG cuts corporate tax rates across the board,
whereas UK is more selective in offering tax exemptions on foreign profits and dividends.
Attracting more investments (both domestic and foreign) has AD and AS impact on the
economy. In the SR, the impact is to stimulate more spending and hence boost actual
growth. In the LR the impact is to expand productive capacity and hence boost potential
growth prospects.
Limitations of tax policy
10

In the context of a recession, cutting corporate tax rates and offering other incentives
might not be effective if business sentiments are weak/pessimistic.
Other Policies
Evidence [Ext 3]: FTA
Analysis of the policy:
Singapore aggressive pursuit of FTAs can lead to trade creation and extension
of markets for Singapores exports plus encourage FDI. In the context of a global
downturn this policy helps to keep the doors to free or freer trade open especially
when many countries tend to resort to protectionism measures to protect jobs.
Moreover it helps SG to diversify our export markets away from too much reliance
on our traditional trade partners e.g. US and EU.

Compared to SG, UK is less reliant on trade. Hence the extract suggests there has
been talk (albeit no clear indication of action or implementation) about using
protectionist measures to save jobs.

Limitations of the policy:


Forging FTA may run into obstacles such as protectionist sentiments especially in the
climate of a global recession.
Conclusion:
Given that both countries are confronting the same basic problem of a global downturn
their policy responses have both similarities and differences. The priority has been to
mitigate the harmful effects of the recession on unemployment. However the approach
used by both differs principally in terms of focus. As an SOE ( small and open economy)
SGs focus is on using measures such as ERP and SSP to address the collapse of
external demand. Whereas as a B(ns) OE (Big and not so open economy) UKs focus is
on fp and mp to boost domestic demand.
L3
(7-9m)

For an answer that analyses the similarities and differences in choice of growth
policies between the UK and Singapore. Answer also includes explanation of the
limitations of the policies chosen. Analysis from first principles.

L2
(4-6m)

For an answer that explains similarities and differences in choice of growth policies
between the UK and Singapore.
Max 5m for answer that explains either similarities or differences.

L1
(1-3m)

Sketchy answer that just lists or briefly explains the policies of both countries
briefly without comparison.

E2
(2-3m)
E1
(1m)

For substantiated evaluation on the type of policies the 2 governments employ.


For relevant judgments on the type of policies the 2 governments employ, but
without explanation.

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