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GCE 'A' LEVEL H2 ECONOMICS (9732) 2008

CASE STUDY QN 2 ISSUES IN TRADE & GLOBALISATION A(i) The Yuan had appreciated in 2006. A(ii) Disappointingly a significant number of candidates failed to use the appropriate economic terms and failed to score. For example, answers that stated that the balance was negative or that it was falling, failed to score because they failed to use the appropriate economic terms in the given context. The United States had a deficit on the current account of the balance of payments and that this deficit was becoming larger.

(b) This question required the simple application of demand and supply principles in the context of the foreign exchange market. The foreign exchange rate of the Yuan is simply the price of the Yuan and like any price it is determined in a market by the forces of demand and supply. Whether the claim that China acted as a currency manipulator would depend upon whether the Chinese authorities were fixing the price of the Yuan below equilibrium price in the market for foreign exchange. There was considerable evidence in the data to suggest this. Common error: in order to score well here it was not necessary to understand the detail of fixed exchange rate systems. Step 1: Cause: manipulation / Effects: forex (price of currency) Step 4: How manipulation leads to lower price. Eg: the stable value of the Yuan from 2000 to June 2005 would be unlikely to occur in a free market. This suggests that market intervention was taking place. This is linked to the changes shown in the value of Chinas foreign exchange reserves which show a considerable rise from the year 2000. This together with the increasing current account surplus suggests that the Chinese authorities are selling Yuan and purchasing foreign exchange over the years to exert downward pressure on the value of the Yuan.

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(c) Understanding of the term dumping is key here. Dumping occurs when goods are sold in overseas markets at a price below cost, more precisely marginal cost. The motive is often to drive domestic competitors out of the market with the aim of establishing monopoly power in the future. Many candidates seemed to think that dumping was simply selling at low prices in foreign markets. The better answers to this question provided an accurate definition of dumping. They then went on to explain how they would assess whether the low prices of imported goods could be considered as dumping. Note: This question falls under the theory /concept type of question. Define dumping. (You get credit for defining in DRQ-type qns). Either sell large quantities (Q) and / or at very low prices (P). Criteria: only allowed to decide based on PRICE. In fact P < AC, or even P < MC Need to consider whether low prices were a result of low input costs in China, which reflect CA, or whether it was a deliberate policy to sell below marginal cost. Alleged, the exporters receive help from the Chinese government through, for example, subsidised rents and tax exemption. If proven, dumping is certainly taking place.

(d) In response to this question candidates were asked to consider the two examples of protectionism provided in the data and assess whether they could be justified in terms of economic theory. It was expected that judgement would be made with reference to the principle of CA. Arguments that are over used to justify protectionism include the so called infant industry argument. Such industries are those that have the potential to develop comparative advantage in the future. Error: A disappointingly large number of candidates simply listed and explained a large number of arguments in favour of protectionism with no reference to theory at all. Step 1: Cause: Indian govts treatment & EUs treatment Effects: justifiable? Step 4: What rationale leads to Indias and EUs treatment respectively? Step 5: Are rationales justifiable? In SR vs LR? Objective of rationale worsened?
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(e) This question required candidates to assess whether the growing doubts about globalisation were well founded. It was expected that good answers would give a balanced assessment of both the advantages and disadvantages of globalisation and then provide some overall evaluative judgement. Some students simply repeated the material that had been learned in class. Candidates are reminded that the questions that carry a high mark allocation are designed to test the higher-order skills. In fact, this paper is designed primarily to test skills. Repeating class notes with little exercise of judgement will result in a poor mark. To score well, candidates need to develop answers that use the material provided as a stimulus to answer the question in the context provided by the case study. They need to reach a considered judgement after a thoughtful consideration of all the issues that are relevant. Step 1: Cause: not given / Effects: less globalisation Step 4: how case suggests less globalisation Step 5: how case do hints at push for globalisation. FTAs, i.e. own knowledge. WTO Example: Define globalisation (though no marks for content mini essay) Each extract suggest reason and type of protection. Case also contains ideas that do suggest further globalisation. Own knowledge: can bring in Spore FTA efforts, WTO, etc.

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