Suggested Answers for C2 H1 BT1 Case Study

Suggested Answers for C2 H1 BT1 Case Study (a) (i) Compare the trends of commodity prices for soft commodities and hard commodities from 2011 to 2015. [2] Similarity: Both commodity prices for soft and hard commodities experience decreasing trend. (1m) Difference: Commodity price for hard commodities fell faster than that of soft commodity (1m) Markers comments Positive aspects 95% recognize the need to state both similarly and difference in trend Many of which, can write very succinct similar using comparative words: Both, However. Example: Areas for improvement Error There is a steeper decline in price for hard commodities than soft commodities Price of hard commodities is consistently higher than soft commodities Est. % of Remarks students who made this error 60 This is vague. Absolute change is less meaningful than giving & change (relative change) Skill package pg 8 30 The data given is in index form. You will not be able to tell the absolute value of the price. Skill package pg 8 Did not provide difference in trend 5 The command word is COMPARE, you need to provide BOTH similarity and difference Breaking down of time period i.e. 2011 2013, 2013 to 2015 Skill package pg 14 5 This is not accepted, unless the trend is symmetrical. That is, the start and end point is about the same, over approx.. same no. of years. Skill package pg 10

(ii) Using Extracts 1 and 2, account for above trends. [4] For each trend, students need to identify at least one factor For full credit, you need to cover scope i.e. demand and supply factors, accounting for both similarity and difference in trend Similarity: Both commodity prices for soft and hard commodities experience decreasing trend. This is because Lower unit COP due to falling oil prices as it lowers transport cost and possibly electricity cost as well increase in supply of both hard and soft commodities OR Oversupply of aluminum and copper (due to possibly overinvestment (increase in number of producers) in China s economy which contributes to increase in world supply) + Positive supply shock on soft commodities such as bumper harvest of wheat and maize which contributes to increase in world supply of soft commodities OR China s slower growth could have resulted in bleak consumer sentiments globally (expectation of stagnant/ fall in income) --> hence fall in demand for goods and services such as soft commodities (food) and other consumer goods. Furthermore, with the fall in expected profitability, producers may reduce production fall in demand for inputs such as hard commodities (this point is preferably stated in 2 nd part on difference) Difference: China s slower growth could have resulted in bleak consumer sentiments globally (expectation of stagnant/ fall in income) --> hence fall in demand for goods and services such as soft commodities (food) and other consumer goods. Furthermore, with the fall in expected profitability, producers may reduce production fall in demand for inputs such as hard commodities Fall in demand for hard commodities could be faster than that of fall in demand for soft commodities as demand for hard commodities fell more significantly due to China s slowing growth as evident in Extract 2. (1m) Similarity- 2m (can give 1dd/ 1 ss factor) Difference - 2m (need to explain that demand for hard commodities fell significantly 1m, dd factor 1m) Markers comments Positive aspects

A small handful of students recognize the need to give reasons for 2 trends, i.e. similarity and difference. They also use very CLEAR TOPIC SENTENCE Example: Those who score 3 or 4 m, identify and explain the demand and supply factors clearly, not just lifting from the case study extracts Areas for improvement Error Est. % of students who made Too Descriptive, just lift key phrases E.g. This can be seen from extract 1 where there is collapse of oil prices This leads to increase in supply for hard commodities. Many candidates could not explain WHY price of hard commodities fell faster than that of soft commodities. This also stems from a(i). Even if they want to explain why price of hard commodities fell steeper, they could not identify and explain correct factors Explain AD/AS! Either students foundation is too weak, or simply did not study. Remarks this error 60 Need to identify and explain the relevant supply factor 80 Always anchor on DD/SS factor(s) for such question (change in price of a good). They will be a starting point for brainstorming of possible answer. 10 This is a MICRO qn analysis on PRICE OF A GOOD, not general price level on an economy. (b) (i) Explain what is meant by real GDP. [2] Define GDP (1m) Meaning of real value (1m) The GDP is the market value of all final goods and services newly produced within the geographical boundaries of an economy in a given period of time (usually one year). Real GDP is GDP measured at constant prices or base year prices OR It is GDP with effects of inflation being removed. Markers comments

Positive aspects A small handful of students can define this properly. Good job! Areas for improvement Error Est. % of students who made Did not provide ACCURATE definition. Forgot to include phrases like market value, FINAL goods and services, Newly produced Remarks this error 50 Please study and be familiar with definitions Note that you will not be awarded even though you have stated Real GDP = Nominal GDP/GDP deflator x 100% if your definition is already wrong! concept error 30 It is GDP with effects of inflation being removed. with inflation rates included Overcapacity refers to an economy operating below full employment, that is, Ye (at point A) <Yf (on the boundary of PPC), where resources are not fully utilized. Consumer goods Point A 0 PPC Capital goods 1m for definition and 1m for well-labelled diagram Note: Some candidates draw shift in PPC outwards (potential growth) and indicate that there is no/insignificant actual growth which results in excess capacity (not fully utilizing resources). This is acceptable. Markers comments Positive aspects Those who studied chapter 2 and understood PPC well are able to do this question. (Who says PPC concept is not important?)

(iii) Areas for improvement Error Est. % of Remarks students who made this error Draw a point on/outside PPC 65 Did not understand PPC at No point stated at all 10 all. Please revise! Wrong labelling e.g. Food and iron?? 5 Did not explain with reference to 20 You have to explain what diagram e.g. point A means. Link to the extent to which the economy utilize her resources. Extract 2 mentions that China s economic growth has slowed to 7.3% in 2014, after decades of growth that has hovered around 10%. Consider whether slower economic growth is beneficial to China. Economic growth refers to the expansion or annual percentage increase in an economy s level of output over time. It includes both actual growth and potential growth. Thesis: Slower (potential) economic growth is beneficial to China [6] Beneficial to slow down potential growth => Overcome problem of overcapacity (excess capacity) Fuller utilization of resources (as shown in (i)), which reduces output gap Overproduction may trigger loan defaults by companies that have borrowed and then watched their profits fall Overproduction of commodities such as steel has resulted in falling prices, and producers are exporting them at very low prices producers suffer reduced profits/make losses may worsen unemployment. Reducing negative externality from production from pollutive industries Note: Many students explain how slower growth reduces demand pull inflation. For such argument, they need to substantiate with date from 2011 to 2015 showing

how slower growth results in lower inflation rate. But they must note that the current problem is overcapacity (operating at excess capacity for full credit). Anti-thesis: It will not beneficial if actual growth is reduced Overcapacity deflationary effect expectation of fall in income fall in C Continued slowing down of economic growth, if below 7% insufficient job creation Synthesis depends on whether China is able to restructure effectively. L3 Well-developed discussion of both sides with evaluation. Good use of evidence. 5-6 L2 Underdeveloped discussion of both sides or well 3-4 developed discussion of thesis/anti-thesis. Minimal use of evidence. L1 Smattering of valid points 1-2 Theoretical, did not use case information at all. Markers comments Positive aspects Majority of the students show awareness of the structure required for such question Consider whether that there are 2 sides of the argument required, with synthesis. Good! A handful of students understand the concept of overcapacity and analyse using case information. Example:

Areas for improvement Error Est. % of Remarks students who made this error Theoretical analysis -- assuming that China is faced with demand 90 If students want to justify its benefits with this point, they pull inflation, operating at full can only do so in comparing capacity. Did not even state the time period. the economic growth and inflation in 2011 vs 2015 (table 1). Unfortunately, most students just regurgitate from the notes, without reference to case Too many quotes without economist analysis. This is LIFTING! information. 20 This is not considered as economic analysis. There is no application. (c) Discuss the effectiveness of the policies implemented by China in a bid to revive slowing economic growth (Extract 2). [6]

Introduction China s growth slowed down from 9.5% in 2011 to 7.3% in 2014 need to implement policies to revive economic growth to ensure that there s sufficient job creation. Policy 1 Devaluation of Yuan Explain how it works (via improving NX) Effectiveness * can consider SR/LR impact - it stimulates external demand, not domestic demand which is required for restructuring Policy 2 Expansionary Monetary Policy (lower interest rate) Explain how it works Effectiveness insignificant cut of i/r of 0.25% points With falling producer prices. Real interest rate is 10% unlikely to borrow to increase investment Furthermore, there is overcapacity in China, further increase in investment without corresponding increase in demand for final goods and services is not beneficial. It will just add on excess capacity. Example of clear economic analysis on how the 2 policies work (Note: student need to continue with AD/AS analysis and explain impact on real NY): Synthesis Aim is to increase AD to reduce excess capacity problem L3 Well-developed discussion of 2 policies with evaluation. Good use of evidence. 5-6

L2 Underdeveloped discussion of 2 policies or 3-4 well developed discussion of 1 policy. Minimal use of evidence. L1 Smattering of valid points 1-2 Markers comments Positive aspects Majority of the students show awareness of the structure required for such question Discuss the effectiveness Majority of the students understand how both the policies work.

(d) Areas for improvement Error Est. % of Remarks students who made this error While most students show 50 Students need to be very understanding of how the policy works, analysis is either familiar with the steps of (in depth) analysis i. not in depth (missing parts of analysis e.g. did not explain how devaluation affects X and M respectively, with assumptions of PEDx and PEDm) ii. some state that lowering interest rate increases disposable income (WRONG) Weak and general anti-thesis, without use of case information No synthesis at all 80 50 Students should not just lift the case information too. Need to infuse the case info into analysis Discuss the relative impact of China s slowing economic growth on the economies of US and Saudi Arabia. Introduction General Impact on China s slowing economic growth on both economies of US and Saudi Arabia (Choose 3) [8]

Economic Growth China is one of their main trading partners. With reference to Fig 2 Slower economic growth as seen from Table 1 Both US and Saudi Arabia experience a fall in export revenue to China. As mentioned in Extract 3 Imports of plastics from South Korea, the US and Japan, and steel products from South Korea are just a few examples of goods where Chinese demand is lower. fall in DD for exports from US and Saudi Arabia as well (esp the latter being major oil producer) Furthermore, both countries experience fall in FDI, could be due to the wide impact of slowing China s economic growth on business climate Declining growth (evident from positive correlation between china growth and US/S.A economic growth from 2011 to 2013. AD/AS analysis, showing fall in AD and hence reduction in real NY. LR: slower rise in LRAS given decline in FDI. ** Note: Ideally, students should show slower increase in AD and hence slower economic growth. But we will still accept fall in AD. EV: not only fall in DD of X from China. The falling commodity prices also contribute to declining export revenue of oil and other hard commodities. (DD for crude oil is price inelastic. With fall in P, this results in less than proportionate increase in Qd X revenue still fall) Unemployment From above analysis, there should be increase in unemployment rate. (Ideally, unemployment rate should still decrease, c.p. given that there is still increase in real NY, but at slower rate). EV: However, from Table 2 & 3, Unemployment rate in Saudi Arabia remains relatively constant while US unemployment rate falls. This could be due to the policies implemented in their countries. E.g. US implemented QE to boost their economic growth and hence reduce unemployment. Inflation From above analysis, general price level falls (mainly due to falling hard commodity prices (Ideally, inflation rate is falling, i.e. general price level is rising at decreasing rate as shown in Table 2 & 3) EV: Also due to falling soft commodity prices (but there are other reasons besides China s slower growth) Balance of payment (BOP) Impact on current acct (use Table 2 and 3) and financial acct (via FDI) Both countries experience significant decline in FDI. US experiences declining trade deficit. Saudi Arabia experiences declining trade surplus. Overall, both countries should experience worsening BOP.

EV: it involves int l transaction, not just with China. Synthesis: Explain why impact on Saudi Arabia is greater than that of US Use Fig 2 Saudi Arabia more dependent on revenue from oil exports. The falling oil price has significantly reduced their export revenue as seen from Table 2. US less dependent on export revenue earned from China for growth. L3 Well-developed analysis, on impact on 3 macro goals (both internal and external for scope). There is discussion on relative impact. Well supported with evidence. 5-6 L2 Under-developed analysis, on impact on at 3-4 least 2 macro goals. There is minimal discussion on relative impact. Some attempt to use evidence. L1 Smattering of valid points. 1-2 E2 Well substantiated conclusion 2 E1 Unsubstantiated conclusion 1 Markers comments Positive aspects Majority of the students show understanding of the question, linking to the impact on economic growth of Saudi Arabia and US Areas for improvement Error Est. % of Remarks students who made this error Did not explain clearly HOW china s 70 slower economic growth affects Saudi Arabia and US. Instead, many students just lift information/data from case study to show the impact. Lacks scope only analyse impact on economic growth. Time management issue? Lack of comparsion. Command word is Discuss the relative impact. There is a need to COMPARE the effects. Inaccurate use of data 90 For scope, there is a need to analyse impact on 3 macroeconomic goals 50 50 The fall in X as shown in Table 2 and 3 shows Export revenue earned by exporting to all trading partners, not just China. A more useful information on how slower growth in China affects demand

for X of SA and US would be Table 2. No synthesis at all 80 Hence, there is no evaluation marks. [Total: 30 marks]