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1 Section A Answer all questions in this section.

Question 1 Ukraines Steel Industry

Extract 1: Ukraines economy World steel prices are highly sensitive to global economic downturns. The earnings of major steel exporters such as Ukraine are therefore closely linked to trends in the world economy. As global car manufacturing and construction activitiesand hence steel priceshave sunk in the deepening world slowdown, Ukraines fortunes have been dragged down too. The steel industry accounts for about 12 percent of Ukraines national income, and for more than one-third of total exports of goods. Many other economic activities depend on the steel sector. A surge in steel prices from 2000 to 2008 underpinned Ukraines largely favourable export performance and impressive GDP growth: between 2001 and 2007, the Ukrainian economy grew by an average of 7.5 percent a year in real terms. Amid the global economic crisis, the commodity boom of recent years ended abruptly, and with global car sales slumping and a sharp contraction in construction activity, steel was particularly badly affected. The collapse of steel prices has hit Ukraine hard. Source: Finance And Development, Vol 46 No.1, 2009

Figure 1: World steel prices

Figure 2: Ukraine Real GDP


% change YOY

Source: Inside Council; Summit Business Media

Source: World Steel, WSD, Macquarie Research

2 Extract 2: The primary steel production methods, accounting for about three-quarters of total steel, reduce iron ores to hot metal in the first step and then refining it to steel. This production of steel from ore is the most energy intensive and emits CO2 the most. The main production routes for primary steel are blast furnace (about 66% of total), direct reduction (6% of total), and open hearth furnace (3% of total). Steel is also produced by recycling scrap steel, often in combination with a form of iron. While it is true that every steel company and every steel-producing country is at a different point of maturity and development, the steel products manufactured and traded around the world are highly interchangeable. Today, 40% of the worlds steel is traded internationally and over 50% of total production is in developing countries. Source: American Iron and Steel Institute, 2008 Extract 3: Japan, seeking to meet a 2012 cap on greenhouse-gas emissions, agreed to purchase carbon dioxide credits from Ukraine in its first such overseas deal. The two countries signed a contract for the sale of credits under the United Nations-sponsored Kyoto Protocol today in Kiev. The sale comes under a so-called green investments plan, which will allow Ukraine to boost spending on environmental projects and energy-saving technologies. Japan, seeking to avoid a shortage of emission permits, plans to buy credits for as much as 100 million tons of carbon dioxide equivalent, and is holding talks with the Czech Republic, Hungary, Poland and Russia. Japan is in a tough situation, said a senior climate-change researcher at Mitsubishi Research Institute Inc. in Tokyo. Rather than buying more credits from other nations, the country needs actions to cut its domestic output. Japans emissions rose 8.7 percent in the year through 2008 from 1990 levels. Under the Kyoto accord, Japan pledged to cut greenhouse gases by 6 percent in the five years through 2012, according to the Environment Ministry. The country has so far bought 23 million tons worth of certified emission reduction credits, the Trade Ministry has said. Ukraine plans to spend the revenue from credit sales solely on emission-reduction projects, Igor Lupaltsov, head of the Environment Investment Agency, said in November. Source: Bloomberg, 18 March 2009 Figure 3

Changes in GHG* emissions 1990 2009 (%)


8.7

Source: US Dept of Energy, http://www1.eere.gov *GHG greenhouse gas

3 Questions

(a) (i)

Describe the trend of world steel prices between 2003 and 2008.

[2]

(ii) With reference to the data and with the aid of a diagram, account for this trend. [3] (b) (i) What is meant by price elasticity of demand? [2]

(ii) Explain what the data suggests about the price elasticity of demand for Ukraine's steel. [3] (c) Discuss the measures the Ukraine government can adopt to stabilise the country's domestic steel prices. [6]

(d)

Explain why steel production is inefficient from society's point of view.

[4]

(e)

Evaluate the effects of Japan's offer to buy emission permits from Ukraine on the global level of carbon emission. [10]

[Total: 30 marks]

4 Question 2 Economic Imbalances

In the global balance of payments, actions in any one place must be accompanied by equivalent reactions elsewhere. Chinas rising savings rate in the past decade, offered the great counterpart to the United States declining savings rate, just as its rising trade surplus corresponded to Americas equally unprecedented trade deficit. As the world works through the consequences of the global crisis, two seemingly unstoppable forces are working in opposite directions and it isnt obvious what the outcome will be.

Extract 4: The United States Economy US savings has finally risen for the first time in a while. For twenty years, growth in US savings has lagged growth in the US economy, and one consequence has been a widening trade deficit, which Americans have increasingly financed with debt. When the annual US current account deficit reached 3 percent of GDP in 1999, economists warned that the trend was worrisome. In 2006, the annual deficit reached 6.5 percent of GDP a record $857 billion thus compounding economists concerns. To fund its chronic deficit, the United States absorbed a majority of net capital outflows from other regions of the world. The total US net foreign debt has swollen to $2.7 trillion.

Extract 5: The Chinese Economy Chinas response to the global crisis has been an extraordinary expansion of credit new lending in the first six months of 2009 was equal to 25 per cent of Chinas GDP along with a surge in municipal, provincial and central government deficits. However, Chinas policymakers face a unique challenge in trying to boost private consumption spending. Although private consumption totalled $890 billion in 2007, making the country the worlds fifth-largest consumer market, behind the United States, Japan, the United Kingdom, and Germany (which China recently surpassed as the worlds third-largest economy), Chinas consumption-to-GDP ratio36 percentis only half that of the United States and about two-thirds those of Europe and Japan (Figure 6). The sources of Chinas low consumption rate are both behavioural and structural. The average Chinese family saves 25 percent of its discretionary income, about six times the savings rate for US households and three times the rate for Japans. Indeed, Chinas savings rate is 15 percentage points above the GDP-weighted average for Asia as a region. Frugalitys impact is compounded and in many ways producedby structural features that restrict consumptions share of the national income, which is only 56 percent of it compared with more than 60 percent in Europe and more than 70 percent in the United States.

Extract 6: The Result? As American debt levels have begun to fall, US households are reducing their consumption to repair their tattered balance sheets. The result has been a decline in the US trade deficit, a process that most experts believe will continue for several more years. Most of the fiscal and monetary expansion in China however is being channelled by the banking system into investment, with much of it ending up in increasing Chinas productive capacity faster than it increases consumption. The result is that the measure of how much Chinese production exceeds Chinese consumption, its trade surplus, has not contracted at nearly the rate at which the Americas excess of consumption over production, its trade deficit, has contracted.

5 Extracts 4, 5 & 6 are adapted from these sources: 1. A Consumer Paradigm for China, McKinsey Global Institute, Aug 2009 2. http://www.telegraph.co.uk 24 Aug 2009 Figure 4: US Private Consumption Expenditure

Figure 5: US Balance on Current Account

Figure 6: Private Domestic Consumption as % of GDP, 2008

Table 1: Chinas Current Account Balance

Year 2008 2007 2006 2005

US$ billion

$426.11 $371.80 $249.90 $160.80

Source: World Development Indicators, The World Bank Group

Table 2: Singapores Exports & Imports

Source: Annual Economic Survey of Singapore 2009

Questions:
a. Explain the meaning of the balance of payments of an economy. [2]

b.

(i)

With reference to the data, analyse the relationship between private consumption expenditure and the balance on current account in the United States from 1999 to 2009. [3] Why is the trend of widening trade deficit worrisome, according to economists? [3]

(ii)

c.

With the use of appropriate diagrams, explain how the current account balance for China from 2005 to 2008 might affect the following: (i) (ii) The economic growth of the country The exchange rate of the countrys currency. [4]

d.

Consider the impact of the reduction in consumption in the United States on the Singapore economy. [8]

e.

Discuss the desirability of the policy of expansion of credit to Chinas economy. [10] [Total: 30 marks]

Section B Answer one question from this section

3.

Compared with December 2008, the consumer price index remained stable in December 2009. Higher costs of transport & communication and health care were offset by lower cost of housing. Singstat.gov.com.sg a) b) Explain the reasons for the rising health care costs in Singapore. [10]

Assess the desirability of the government fully subsidizing healthcare expenditure in Singapore. [15]

4.

The Ministry of Trade and Industry (MTI) announced today that it expects the Singapore economy to expand by 13.0 to 15.0 per cent in 2010, an upward revision from the earlier forecast of 7.0 to 9.0 per cent. Straits Times 14 July 2010 a) b) Explain the indicators used in assessing the economic health of a country. [10] Discuss whether higher economic growth necessarily leads to a higher standard of living in Singapore. [15]

End of Paper