2020 H2 Economics Paper 1 Case Study 2: Suggested Answers
The case study looks at the US and China trade war and its effects on a small open economy, testing the current account, the effect of a shrinking labour force, floating exchange rates as a buffer, the balance of trade, supply-side policy, and whether Singapore gains or loses.
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A two mark question, with reference to Table 4, asking for the two components of Singapore's current account other than the goods and services balance.
In addition to the goods and services balance, the two remaining components of the current account are the primary income balance and the secondary income balance.
The primary income balance is the net earnings from the cross-border flow of factor income. It includes income earned by residents working abroad net of payments to foreign workers employed domestically, and dividends, interest and profits received by residents from investments abroad net of similar payments to foreign investors in the domestic economy.
The secondary income balance is the net transfer of income between residents and non-residents with nothing given in return. It includes remittances sent by workers abroad to families in their home country, and unilateral transfers such as foreign aid, donations and grants between governments or organisations.
Name the two remaining current account components and describe what each captures.
Tests: Balance of payments
A two mark question, using a production possibility curve diagram, asking for the likely impact of the change in China's labour force described in Extract 6 upon China's economic growth.
The shrinking labour force in China reduces the economy's productive capacity, which is shown as an inward shift of the entire Production Possibility Curve (PPC) towards the origin. With fewer workers available, the economy cannot produce as much output, lowering its potential GDP.
This negatively affects China's economic growth by limiting the ability to expand production of both capital and consumer goods.
Link the smaller labour force to an inward shift of the PPC and lower potential output.
Tests: Aggregate demand and supply
A four mark question, with reference to Extract 7, asking why a floating exchange rate might mean the Chinese economy was well placed to withstand external shocks.
A floating exchange rate adjusts automatically to external shocks. When a shock such as tariffs in the US and China trade war reduces the demand for Chinese goods, the demand for the Chinese currency on the foreign exchange market falls. As demand shifts leftward from DD0 to DD1 along the supply curve, the price of the currency in foreign currency terms falls from P0 to P1, which is a depreciation.
The depreciation then self-corrects the economy. As the currency weakens, Chinese exports become cheaper and more price competitive abroad, which raises the quantity demanded of exports and partially offsets the original fall in demand caused by the shock.
The floating exchange rate therefore acts as a built-in stabiliser. By allowing the currency value to adjust to market conditions, it cushions the economy against external disturbances, supporting the claim that China was well placed to withstand such shocks.
Trace the shock through a fall in currency demand, a depreciation, and the self-correcting boost to export competitiveness.
A four mark question asking for two factors that will determine the impact upon the US balance of trade if China raises tariffs on imports from the US.
Price elasticity of demand for US exports. If demand in China for US exports is price elastic, because consumers are sensitive to price and alternatives are available, then the tariff induced rise in price causes a more than proportionate fall in quantity demanded. This significantly reduces US export revenue and worsens the US balance of trade. If demand is price inelastic, the effect on export revenue is smaller.
Proportion of US exports going to China. The more the US relies on China as an export market, the larger the effect of Chinese tariffs on the US balance of trade. If US exports are well diversified and China takes only a small share, the impact is less pronounced.
Two distinct factors, each explained for how it scales the effect of the tariff on the US balance of trade.
Tests: PED and PES, Balance of payments
An eight mark question asking how supply-side policies aimed at Singapore's labour market could make the economy more resilient, and how likely they are to be successful.
- Define economic resilience and frame labour market supply-side policy as the route to it.
- Set out one labour market policy and the mechanism by which it raises resilience, then state what its success depends on.
- Set out a second, distinct labour market policy and its mechanism, then state its limitation.
- Weigh how likely the policies are to succeed, conditioning the judgment on implementation factors.
This part is gated. The full model answer with the worked supply-side analysis and the evaluation of success, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
A ten mark discussion of whether an open economy such as Singapore would gain or lose from an ongoing US and China trade war.
- Frame the question for a small open economy and set up the two opposing sides.
- Build the gains case through trade diversion and its effect on the relevant aggregate demand components.
- Build the losses case through the economy's reliance on its major trading partners and disrupted supply chains.
- Distinguish short run opportunities from longer run effects when weighing the two sides.
- Reach a judgment on the net impact, stating what it is contingent on.
This part is gated. The full model answer with the worked ad and as analysis and the evaluative judgment, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Questions students ask
Where can I get the full worked answers to the 2020 H2 Economics paper 1 case study 2?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2020 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How are these case study suggested answers structured?
The lower mark parts are answered in full. The higher mark parts are outlined here, with the full worked answers reserved for the ETG TYS Answers book and the TYS Crashcourse.
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